When Geoffroy van Raemdonck, chief executive officer of the Neiman Marcus Group, took the stage at the WWD CEO Summit in October, he started with the heart.
Van Raemdonck talked about the increasingly “transactional” nature of the world, the need to recapture the hearts and minds of consumers — the “economics of love.”
But his plans to remake the luxury retailer and transform it for the digital age are dependent on a much more traditional kind of economics, which rely on dollars, cents and the ability to corral a diverse group of creditors behind a shared promise of bigger returns in the future.
WWD reported in September on the ebb and flow of talks with its creditors and its efforts to extend to push back its due date to gain some extra breathing room. But the company was forced to put a fine point on the issues surrounding its refinancing in a filing with the Securities and Exchange Commission last week.
The filing of the document indicated that one stage of negotiations had ended, but more talks might well be in the offing.
In short, Neiman Marcus is in a tough spot, paying off debt built up in two successive private equity buyouts, but it still has a well-known brand, growing connections with a well-heeled customer base and some time to work things out.
Here, a by-the-numbers look at Neiman Marcus’ recent efforts to balance heart with pocketbook, according to its SEC filing.
Neiman Marcus has a bewildering array of growth-inducing initiatives in the works and on the drawing board — from efforts to cultivate customers and expand digital personalization to plans to grow bergdorfgoodman.com and the digital luxury stylist experience. Sales topped $4.9 billion at the company last year.
But job number one is to get out from the company’s $4.6 billion debt load, which includes a $2.8 billion term loan due in October 2020 and two sets of bonds and an asset-backed loan due in 2021.
Last fiscal year, the company paid more than $307 million to cover interest on that debt. Even more troublesome are the upcoming maturities. When the term loan comes due and likely a year before, Neiman Marcus will not be able to simply reach into its coffers and pay up. It needs to reach some kind of a deal with lenders or the equity in the firm, acquired by Ares Management LLC and the Canada Pension Plan Investment Board for $6 billion in 2013, will be in jeopardy.
Neiman Marcus’ debt weighs in at 10.2 times its annual earnings before interest, taxes, depreciation and amortization — an excessive level for the world of department store retailing, where Nordstrom Inc.’s debt, for instance, sits at 1.7-times EBITDA.
And while Neiman Marcus undoubtedly would like to reduce its debt, it is paying particular attention to the other side of the ratio and looking to drive adjusted EBITDA to more than $700 million within five years.
That’s a long haul from adjusted EBITDA of $458 million for the last 12 months. Creditors have been weighing the risks of giving Neiman Marcus time to follow through on its plans and try to hit that goal or to try to get what they can as soon as possible.
To get more time, Neiman Marcus is going to have to give something more, too. The company’s proposal to restructure its debt includes the addition of collateral — namely the value of its leases, which it pegged at $1.9 billion.
The retailer proposed that term-loan lenders could “receive liens and structural seniority on all unencumbered ground leases and operating leases.”
Neiman Marcus cited a third-party valuation that pegged the value of its leases at $1.6 billion plus another $250 million tied to ground leases.
While that’s a lot of money and a solid cushion, the question in debt circles is just how true-to-life those estimates are and if creditors could really cash in on those leases.
Neiman Marcus’ balance sheet is a balancing act involving the company and its equity owners, term-loan holders and two groups of bondholders and other lenders.
The negotiations in October and November included three proposals — none of which did the trick.
One group of bondholders was looking for a $250 million paydown, extended terms on the rest of the debt and equity in the company. Another group of creditors would push back the term-loan maturity for three years, adjust terms and see it backed up by the assets of the MyTheresa business. And the company suggested more runway on the term loan, an exchange of the unsecured bonds and $250 million in new first lien notes tied to an unrestricted subsidiary, Nancy Holdings.
The debt talks might have simply come too soon to really reach a resolution.
For now, Neiman Marcus can live with the status quo, run its business, continue its transformation and keep up with debt payments.
But as time marches on, the pressure will rise. Creditors and Neiman Marcus’ equity backers will have to gauge just what their holdings will be worth if the company can’t refinance.