The stock market might be soaring, but some retailers are drowning in debt. And investors are getting antsy — particularly when it comes to companies that have been painted into a corner by leveraged buyouts.
Investors in Neiman Marcus Group’s debt, in particular, were spooked this week. Bonds tied to Neiman Marcus fell to as low as 58.5 cents on the dollar, down from 74.25 at the start of the year, according to S&P Capital IQ.
Prices have bounced back some in recent days, but the balance sheet realities for the chain won’t be easily overcome. The same is true for J. Crew Group, which has been negotiating with its lenders since early December to try to come up with a sustainable capital structure, which could involve putting the firm’s intellectual property in a separate subsidiary. Bonds tied to J. Crew recently traded at 43.5 cents on the dollar, up from 41 cents on the dollar at the start of the year.
Standard & Poor’s debt analyst Helena Song said J. Crew and Neiman Marcus are in similar positions, with both carrying heavy debt loads, but enjoying some cushion from revolving credit facilities.
J. Crew’s in a weaker spot, though, rated CCC-minus by S&P, while Neiman Marcus is several notches higher, at B-minus.
The J. Crew negotiations have gone silent lately — a source close to the company said it has cash on hand and is still evaluating its options — putting Neiman Marcus’ price drop in the spotlight.
S&P’s Song said the drop in Neiman Marcus’ bond prices was “fairly alarming” but added that “at this point, it’s not in our base case that Neiman Marcus would restructure its capital or have a significant debt buyback in the near term.”
She said Neiman Marcus and J. Crew have seen similar trends in their operations, with the Millard “Mickey” Drexler-led specialty chain just further down the path than the luxe department store.
Song said Neiman Marcus “started their negative trend a little bit later and they have a little bit more runway…but in the longer term, I wouldn’t be surprised if they’re examining their operations as well as their financial strategy.”
William Susman, managing director of Threadstone Partners, said, “Neiman’s as a fundamental business has a reason to exist, no doubt about it.”
The question is, does the company have enough time to adapt its business to the new, more digital realities of the market place.
“It wouldn’t shock me if the debt trades cheap enough that the equity owner would go in and buy cheap debt because they’re keeping control of the company,” Susman said.
Ares Management and the Canadian Pension Plan Investment Board purchased Neiman Marcus from TPG and Warburg Pincus for $6 billion in 2013 — a succession of big-money buyouts that left the company with $4.8 billion in debt, or 9.6-times earnings before interest, taxes, amortization and depreciation.
J. Crew was taken private in 2011 under a $3 billion deal with TPG Capital and Leonard Green & Partners, but has struggled with fashion misses and has been trying to get itself back on track, focusing more on the still growing Madewell business, adding active styles and so on
The specialty chain now has $1.5 billion in debt — about 9.2-times earnings before interest, taxes, depreciation and amortization.
That would be a heavy load in good times.
And now Neiman Marcus, J. Crew and everyone else — is navigating a world changed by the rise of a Millennial shopper less interested in fashion, a shift to more e-commerce, less foot traffic in stores and now a raft of uncertainty driven by fast-moving policy changes under President Trump.