Moody's changes Macy's outlook to negative

NEW YORK, Oct 15 (Reuters) - Moody's Investors Service changed its outlook on Macy's Inc (M.N) to negative from stable, indicating a rating downgrade into junk territory is more likely over the next 12-to-18 months.

U.S. department store operator Macy's slashed its full-year forecast on Friday, warning that its sales could fall sharply in the back half of its fiscal year as shoppers stick to buying necessities.

Macy's said it now expects to earn $1.30 per share to $1.50 per share for fiscal 2008, excluding some impairment charges and costs tied to consolidating its divisions. It had previously forecast earnings of $1.70 per share to $1.85 per share, on that basis. For details, see [ID:nN10360595]

"This degree of earnings decline -- if it occurs -- could result in debt protection measures that are too weak for the current Baa3 rating," Moody's said.

The "Baa3" rating is the lowest investment grade. Downgrades into junk territory can substantially increase a company's borrowing costs.

"Should operating performance decline by more than the company expects, then -- barring other changes in the company's capital structure or cash flow expectations -- debt protection measures could weaken further and be more appropriate for a lower, non-investment grade rating," Moody's added.

The cost to insure Macy's debt with credit default swaps rose 11.5 percent on Wednesday to 466 basis points, or $466,000 per year for five years to insure $10 million in debt.

(Reporting by Karen Brettell; Editing by Chizu Nomiyama )