By David Moin
with contributions from Evan Clark
 on December 20, 2018
Neiman Marcus

The Neiman Marcus Group could soon be confronted by another legal challenge from creditors.

According to sources, a group of term loan lenders are seeking the removal of the administrative agent for the loan, Credit Suisse, because of the bank’s refusal to pursue legal action against the Neiman Marcus Group related to the transfer of the MyTheresa subsidiary shielding the growing luxury web site from any potential creditors’ claims. A new agent could inaugurate a lawsuit.

One source said that about 20 financial institutions, including Aurelius Capital, Texas Pacific Group and Owl Creek Capital, have signed a letter, drafted by the law firm Wachtell Lipton, Rosen & Katz, which went out Friday to Credit Suisse, requesting the bank’s resignation as administrator of the term loan.

As of Thursday, it could not be determined if Credit Suisse responded.

“Ares has been putting pressure on Credit Suisse not to file a lawsuit,” said one source, referring to Ares Management, which along with the Canada Pension Plan Investment Board, bought Neiman Marcus Group in 2013 for $6 billion. That acquisition put $4.6 billion in debt on the books, including the $2.8 billion term loan due in October 2020 and two sets of bonds and an asset-backed loan due in 2021. The pressure is on NMG to work out a way to refinance the debt, well before the term loan matures in 2020. Talks with creditors have been off and on.

The creditors’ lawsuit would follow one filed earlier this month in the District Court of Dallas County by Marble Ridge Capital. That complaint against Neiman’s alleges “the fraudulent transfer of the MyTheresa assets to Ares Management and the Canada Pension Plan Investment Board (Neiman’s owners) for no consideration.” The complaint was filed in the District Court of Dallas County.

“These assets have been placed beyond the reach of the company’s creditors in order to hinder and delay creditor recovery,” the complaint reads.

Marble Ridge also contended that Neiman Marcus is “insolvent” and is seeking in excess of $1 million in damages.

It’s possible that Marble Ridge’s action galvanized other creditors into seeking legal action. “The more people involved in the lawsuit, the better. It creates enormous pressure on Neiman Marcus,” said one source.

Another source on Wednesday said it could take as long as 30 days for a new lawsuit to be filed, if creditors decide to proceed with one. It’s expected that a new lawsuit would contain the same or similar allegations as the first one filed by Marble Ridge.

In the letter, portions of which were communicated to WWD, Wachtell argues that the transfers of the lenders’ equity interests in the MyTheresa business to the Neiman Marcus Group Inc. “are avoidable under applicable law as fraudulent transfers and that the transfers were made “for no consideration at a time when the transferring loan parties were insolvent and/or undercapitalized.”

“The purpose of the transfers was to divert a highly valuable business from the borrower’s creditors to its ultimate equity owners, thus hindering creditors in recovering on their claims.”

The letter asserts that the outcome of the Marble Ridge litigation “will impact all lenders, and it is therefore critical that the agent, on behalf of all lenders, act to protect their interests.” The lenders “require an agent that will commence litigation as directed…”

“Neiman Marcus has not seen the letter,” the company said in a statement to WWD. “It apparently contains allegations similar to those made by Marble Ridge.

“We have made our position clear with respect to those allegations. This distribution of MyTheresa was expressly permitted by the Company’s credit documents. MyTheresa was already an unrestricted, non-guarantor subsidiary not part of our lenders’ collateral and it will remain outside of the collateral. The Company is not insolvent; it always has and will continue to meet its financial obligations. The Company’s performance continues to improve, having just completed its fifth consecutive quarter of positive sales with all Neiman Marcus Group stores earnings before interest, taxes, depreciation and amortization (EBITDA) positive, and adjusted EBITDA increasing 10.6% from the same quarter last year.”

But Neiman’s has been out in front of the situation. It’s been informing vendors of its financial status, with two letters sent out within the last couple of weeks, and has filed a countersuit against Marble Ridge, seeking damages resulting from what Neiman’s terms “a series of false statements” that Marble Ridge has made about the company. Neiman’s said Marble Ridge falsely accused the company of being in default under its agreements with its debtholders and that Marble Ridge made the statements to harm the retailer. Neiman’s seeks more than $1 million in monetary damages.

On Monday, Neiman’s chief executive officer Geoffroy van Raemdonck sent a second letter to vendors, “providing a quick update” on its countersuit against Marble Ridge Capital. Van Raemdonck characterized Marble Ridge as “a small debtholder” and accused the firm of making “false statements” about Neiman’s.

“We denied all of Marble Ridge’s allegations and asked the court to dismiss the lawsuit it filed last week because its claims are legally defective,” van Raemdonck wrote in his letter. “As we have stated before, NMG is not in default and is not insolvent. The company is in full compliance with its debt agreements and we have ample runway to refinance our debt with no near-term maturities.

“Importantly, our business is showing positive momentum,” the ceo wrote.

Neiman’s characterized Marble Ridge’s tactics as “typical in a refinancing process of this type, which is likely to unfold over the coming year. We will not be surprised to see other lenders make similar statements in the coming weeks, which would also be typical…”

“Regardless, it is business as usual at Neiman Marcus,” van Raemdonck wrote.

However, some vendors feel it’s not quite business as usual. “They’ve definitely gotten more aggressive with friends and family, extending it,” said one vendor. “As a vendor, you can’t tell them what to price and not price. Obviously, we’re not happy, but they’re technically allowed to do that. We all have partnership agreements, we support them by taking back merchandise and end-of-season markdown money, but this isn’t the first time we’ve been through this. It’s just frustrating that Neiman’s is doing this. Business isn’t very good out there. The lull (for retailers generally) since Cyber Monday has been big. Hopefully, the next four days will be great.”

“Neiman’s has gotten more aggressive with markdowns, but they had been less aggressive than Saks or Bloomingdale’s,” said another vendor source. “Neiman’s stayed luxury and pure, but now they are catching up,” to competitors. “We partner with Neiman’s on these events and our business is growing and is very strong at Neiman’s. But the business has been driven by an increased level of promotion putting pressure on vendors to support margins.”

A third vendor said, “We’ve had a good year with Neiman’s, but we took a chance by being less involved in their friends and family events.”

The letter and the new assurances to vendors are just the latest steps in Neiman’s complex dance with lenders, which had been referred to internally by the company as “Project Rolex.”

And while the $2.8 billion term loan due in October 2020 is the single biggest chunk of the firm’s debt load, Neiman Marcus also has two sets of bonds, including $960 million in 8 percent notes and $658 million in 8.75 percent notes, both due in October 2021. Those maturities are still a way off, but the company will have to figure out a refinancing well in advance.

And the bondholders have become increasingly nervous as time has drawn on.

The 8 percent bonds, for instance, recently traded at 46.5 cents on the dollar, down from as high as 74 cents in September.

Although the sharp decline in the value of the company’s bonds speaks to the difficulty of the situation, it might help move along the process. Any refinancing would likely have to give bondholders some kind of premium over the current price — and it is much cheaper for the company to top 46.5 cents on the dollar than to have to come in above 74 cents.

Credit watchdogs are keeping close tabs on the retailer.

A report from Fitch Ratings this week noted that Neiman Marcus was the largest player on both its Top Loans of Concern and its Top Bonds of Concern lists. Other companies on the ones-to-watch lists are Toms Shoes, Iconix Brand Group Inc., NYDJ Apparel and Charlotte Russe Inc.

Texas Pacific and Owl Creek did not respond to WWD queries Wednesday afternoon. Credit Suisse had no comment.