Struggling retailer Neiman Marcus was marketing a US$550m Triple C rated junk bond this week as part of a debt exchange aimed at giving the company time to reach a firmer financial footing.
The firm launched a five-year non-call two second lien note this week with Credit Suisse as sole lead, which is also expected to be wrapped up this week.
The debt exchange would term out the company’s debt maturities to 2024, giving the firm some runway to rejuvenate its business after battling heavy leverage and a difficult retail environment since a leveraged buyout by Ares and Canadian public pension fund CPPIB in 2013.
The extend and exchange transactions buy the company time, but not cashflow, according to JP Morgan analysts.
The exchange would add about US$50m to the company’s annual interest expenses, they noted.
The bond will offer an enticing 14% yield - but 8% of that will be paid in cash, while the other 6% is pay-in-kind. Both are payable twice per year.
Sponsors are also dangling credit support from Neiman Marcus’ online luxury clothing business MyTheresa as a bargaining chip in the restructuring.
The new second lien bonds have a US$200m claim on the unit.
Last year the company moved the fast-growing online business out of a restricted subsidiary to the parent level, putting it beyond the reach of high yield bond and loan investors.
But under the terms of the debt restructuring, certain classes of the company’s new capital structure will now receive various forms of credit support from the MyTheresa business.
“The sponsors used MyTheresa as currency to negotiate the restructuring,” Anthony Canale, global head of research at Covenant Review told IFR.
But, if they buy the new bonds, investors also agree to drop any disputes with the firm over the transfer of MyTheresa last year, according to filings.
Hedge fund Marble Ridge filed an unsuccessful lawsuit against the company over the transfer.
Indentures in the bond will also mean that non-participants will be precluded from bringing any claims over the MyTheresa transfer.
The hedge fund has opposed the debt exchange.
“This proposed transaction by Neiman Marcus, if consummated, will not only result in the stripping of several hundred million dollars of value for the benefit of the out-of-money sponsors, but also substantially increase interest expense for an already over-levered company,” they said in a press release on March 25.
The new bond has the safety net of a backstop - some of the firm’s holders of existing unsecured bonds have committed to buy US$450m of the new debt, if it is not otherwise sold, while the company’s private equity sponsors Ares and Canadian public pension fund CPPIB are providing a backstop for the remaining US$100m.
But given the firm’s financial position and in a difficult retail environment, the enticements were not enough of a draw for some investors outside of the backstop group.
“We are not going to touch Neiman,” said one high yield investor. “They are just buying time. It is a lot of leverage in an industry that has typically faced a lot of challenges.”
“Their recent history hasn’t been strong,” said one investor looking at the deal.
Moody’s estimate of the firm’s adjusted debt to Ebida ratio was 10.4 times, with interest coverage at 0.7 times.
“Although the proposed transaction will extend the maturities of its capital structure to provide Neiman more time to improve its business, we expect free cash flow to be negative as leverage remains at unsustainable levels,” said Moody’s vice president, Christina Boni. “The risk of a future distressed exchange remains elevated.”
