Neiman Marcus Group made its case that it needs immediate access to its bankruptcy financing, and also girded for a likely conflict down the road over its restructuring plan.
At a remote hearing on Friday that ran for more than five-and-a-half hours, Neiman’s attorneys and advisers told the Texas bankruptcy judge overseeing the case that the retailer needs urgent access to cash in order to continue functioning.
While some creditors argued that the company’s handling of online retailer Mytheresa could curtail their rights during the bankruptcy, Neiman’s sought to keep the focus on its financing proposal.
The retailer’s advisers argued that immediate access to funds will help preserve the company’s relationships with its vendors, including with brands they said are holding off on shipping to the retailer until it secures bankruptcy financing.
“I’ve been on many calls with various of our key brand partners, and some of the key service providers to us,” Neiman’s chief restructuring officer Mark Weinsten, managing director at consulting firm Berkeley Research Group LLC, said at the hearing.
“They’re desirous to work with us, but will not do so until we demonstrate that we have sufficient liquidity to A, pay them and B, maintain the viability of the business,” he said.
U.S. Bankruptcy Judge David Jones agreed, and indicated that he would grant the interim request for debtor-in-possession financing, saying he found that “the deal, as structured, is the best available alternative to the debtor.”
“This is a complicated deal, it’s a complicated debtor,” Jones said. “In my experience retail cases are hard, this is a capital structure that should scare most people.
“The one thing that is certainly worse than having expensive money, is not having a going concern, and not having a business that employs a huge number of people and serves an important place in society,” he added.
Neiman’s entered Chapter 11 proceedings on Thursday, proposing $675 million in debtor-in-possession financing and a $750 million exit financing package.
While the need for cash is a familiar refrain in retail bankruptcies during a first-day hearing — when companies seek quick approval for DIP financing to operate during the bankruptcy — it is more dire in the context of a pandemic that has shuttered stores for months, the retailer’s advisers said.
Since Neiman’s stores closed in mid-March, the company’s cash flow immediately declined by more than 65 percent, it said. It entered into Chapter 11 with a little over $100 million in cash on hand, a sum that pales in comparison to the roughly $300 million the company expects to burn through between now and when it tentatively hopes to reopen stores in July, Neiman’s said.
Casting a shadow over the proceedings was the conflict over the handling of Mytheresa, the German-based luxury online retailer that Neiman’s acquired in 2014, and which is not part of the current Chapter 11 proceedings.
The retailer’s move of Mytheresa subsidiaries in 2018 to another entity has already been the subject of litigation, including a suit by UMB Bank NA, the trustee for certain debt Neiman’s has issued, that is currently pending in New York state court.
Neiman’s attorney Anup Sathy, a partner at Kirkland & Ellis LLP, told the bankruptcy court on Friday that Mytheresa’s operations had “always been independent” from Neiman’s, and that the entities running MyTheresa were not guarantors of Neiman’s debt.
But the company’s restructuring plan shouldn’t provide a blanket release from lawsuits related to the Mytheresa transfer, said Ed Weisfelner, who chairs Brown Rudnick LLP’s bankruptcy and corporate restructuring practice group, and represents Marble Ridge Capital, which said it is Neiman’s largest unsecured creditor.
Marble Ridge has almost half the unsecured debt under the name of UMB Bank NA, the indenture trustee for senior notes of $80.7 million and $56.6 million.
Regardless of the objections to the terms of the DIP proposal, there is an undeniable need for financing and a lack of viable alternatives, said Chad Husnick, a partner at Kirkland & Ellis, at the hearing.
“We’re in the midst of the most unprecedented outbreak of a disease in history and we’re all working through this together under various social distancing and shelter-in-place orders,” Husnick said.
“We’re doing everything we can between now and then to be prepared for that launch including maintaining our online business, which all takes cash,” he said.
The plan also drew objections from Mudrick Capital Management LP, a creditor that holds some $144 million in term loans to Neiman’s. Mudrick argued that it had offered an alternative to Neiman’s DIP proposal, which it claimed the retailer had turned away. But Husnick told the court Friday that Mudrick’s term sheet proposing some $700 million in DIP financing hadn’t identified any committed lenders and that Neiman’s ultimately decided that the Mudrick proposal wasn’t “actionable.”
Mudrick also took issue with the roughly 6 percent backstop fees in the case, which it argued would provide more than $62 million in fees to the backstop lenders. That is an exorbitant amount for fees, which are separate from commitment fees, that they argued are not justified.
The proposed fees reflect the risk that the DIP loan isn’t repaid, considering that it is junior to the asset-based loan, that is, has a lower priority for repayment than the ABL, said Tyler Cowan, managing director in the restructuring group at Lazard Frères & Co. LLC, investment bank advising Neiman’s.
“We essentially are seeking financing for a company who is largely not operating,” said Cowan at the hearing. “So the magnitude of cash burn rate now is unlike any other I’ve seen in any other Chapter 11 case.
“That is a lot of risk,” he said.