Moody’s Investors Service cut its credit rating on Neiman Marcus Group and weighed in on the prospective financing package that will fund the company’s $6 billion takeover and add another $1.9 billion in debt.
The debt watchdog reduced its corporate family rating on the retailer to “B3” from “B2,” and said the downgrade “acknowledges that the company’s debt levels will increase to about $4.6 billion from $2.7 billion as a result of [Neiman’s] $6 billion leveraged buyout by Ares Management LLC and the Canada Pension Plan Investment Board.”
To fund the buyout, Neiman’s is in the market for a $2.95 billion term loan due 2020 and a total of $1.56 billion in senior unsecured bonds maturing in 2021. Moody’s rated the proposed term loan at “B2” — in-line with the company’s current rating — and the proposed notes three notches lower, at “Caa2.”
The exact terms of that financing package might change depending on how it’s received by the debt market. Ares and the pension fund are also expected to cover 25 percent of the purchase price themselves.
It’s not clear just how much Neiman’s will have to alter its strategy to cover the new debt — the more money that goes toward interest payments, the less that’s available to save as a cushion or spend on the business generally.
Moody’s said that a “sizable amount” of Neiman’s “free cash flow will be used to fund a mandatory cash-flow sweep to repay its term loan” and that it expects the company to keep less cash on hand. Neiman’s is not expected to “materially reduce its debt levels over the next 18 months.” The luxe retailer, however, is also looking at an $800 million asset-based revolving credit facility which the rating agency said supports “good liquidity” for the business.
For Neiman’s, the transfer from one set of investors to another means a deeper debt load.
The retailer’s debt rose to $3.2 billion from about $250 million when it was acquired by TPG and Warburg Pincus in 2005. The investors put $1.4 billion in equity in that deal and loaded $3.2 billion in debt onto the balance sheet of the company — which logged annual sales at the time of $4.11 billion.
If the current deal and financing go through this year as conceived, the company will have long-term debt equal to annual revenues of $4.6 billion.
Neiman’s isn’t the only retailer out in the market for debt.
Moody’s on Monday also assigned a “B3” rating to Hudson’s Bay Co.’s proposed $300 million second lien term loan, which would be due in 2021. The company agreed to buy Saks Inc. for $2.9 billion this summer and has a corporate family credit rating of “B1.”
HBC plans to cover $2.3 billion of the purchase price with first and second lien term loans.
Standard & Poor’s gave HBC’s proposed $300 million term loan a “B-minus” rating and said the company had an “aggressive” financial profile “characterized by its high pro forma debt leverage and thin cash flow coverage.”
The outlook for retail in general weakened considerably this summer, but investors and acquirers have been drawn to deals by cheap financing rates and the fear that interest rates are only going to go up in the coming months and years.