Debt protection costs on Macy's, Limited surge

NEW YORK, Nov 20 (Reuters) - The cost of insuring debt issued by retailers Macy's Inc (M.N) and Limited Brands (LTD.N) against possible default rose to distressed levels on Thursday, reflecting investor concerns about the outlook for the sector.

In the latest bad news for U.S. consumers, the Labor Department reported that the number of workers filing new claims for jobless benefits rose to a 16-year high in the latest week as the harsh economic environment forced employers to cut back on hiring.

"It looks we'll have another ugly payroll number in December," said Carl Lantz, U.S. interest rate strategist at Credit Suisse, referring to the Labor Department's closely watched monthly employment report. "No rest for the wicked."

Five-year credit default swaps on Macy's debt were trading at about 18 percent upfront, or $1.8 million to insure $10 million of debt for five years, plus 500 basis points, according to Markit Intraday.

Credit default swaps trade on an upfront basis when a company is considered distressed and sellers of protection want to be paid more at the outset of the contract due to higher perceived risk of the company defaulting.

Five-year credit default swaps on Limited Brands were trading at about 10 percent upfront.

Debt protection costs for other retailers were also higher, while the main investment-grade credit derivative index widened to a record level.

"Deterioration in the retail sector has been fast and furious, with shoppers shunning discretionary purchases at a rapidly advancing pace," CreditSights analyst James Goldstein said in a recent note.

The research firm has an underweight stance on debt issued by retailers.

The past few months have seen a series of records, from record one-day declines in retailer equity indices to record declines in same-store sales data, he said. Chapter 11 filings also have come ahead of the normal post-holiday filing period, reflecting nervousness about the outlook for the holiday season and fears about the availability of debtor-in-possession loans for restructuring.

Retailers are paying the price for overspending and borrowing during past periods of strong consumer spending.

For example, Macy's spent $3.5 billion on shareholder rewards in 2007, a year when its cash flow totaled just $1.8 billion, according to CreditSights.

"They came to their senses by the dawn of the new fiscal year and essentially turned off the repurchase spigots, but the move leaves Macy's shouldering more debt than appropriate for an investment grade retail name caught in the midst of a sharp consumer downturn," said analyst James Goldstein.

"Not to mention that the company was buying back shares in a year where the average share price was $36 versus today's mid-$9 price," he said.

(Reporting by Ciara Linnane; Additional reporting by Burton Frierson; Editing by Chizu Nomiyama)