Neiman MarcusShop signs, Los Angeles, America - 04 Apr 2015

Marble Ridge Capital is keeping the heat on the Neiman Marcus Group.

The value-oriented distressed debt investment firm sent a letter Monday to NMG in Dallas contending that the credit default swap market believes the retailer has a greater than 80 percent probability of default over five years, from 60 percent earlier, citing Bloomberg estimates.

The apparent reason for this increase, Marble Ridge said in its letter, stems from last week’s preliminary agreement Neiman’s made with its lenders to extend and amend the company’s debt, which includes a provision that NMG becomes a co-issuer of some new debt. The potential deal does raise the value of the CDS (credit default swap) by making it more liquid.

In response to Monday’s letter, NMG characterized Marble Ridge as “a small holder that clearly regrets it has refused the company’s repeated invitations to join creditor groups that reached an agreement in principle with Neiman Marcus last week. Far from increasing default risk, this deal will help support the company’s long-term success.”

The agreement, subject to final approval, is designed to enhance Neiman’s capital structure and gives the luxury retailer some much-needed breathing room to sustain its operations, which have been hampered by its $4.6 billion in debt including a $2.8 billion term loan due in October 2020, and two sets of bonds and an asset-backed loan due in 2021.

Though no deal is signed yet, Neiman’s has lenders of about $2 billion in Neiman’s debt agreed in principle to the deal and Neiman’s is working to get more on board. The proposed deal with lenders would extend maturities out three years. Also, unsecured noteholders would exchange $250 million in notes at par into $250 million of Mytheresa preferred equity and unsecured noteholders would get new securities with potential claims against the value of Mytheresa and with collateral from Neiman’s.

Last year Marble Ridge filed a complaint against NMG in the District Court of Dallas County in Texas alleging a “fraudulent transfer” of the Mytheresa assets to Ares Management and the Canada Pension Plan Investment Board, owners of NMG. Marble Ridge complained that the reshuffling put Mytheresa assets beyond the reach of Neiman’s creditors “to hinder and delay creditor recovery” and wants 100 percent of the Mytheresa assets returned to NMG.

But Neiman’s said, “The distribution of Mytheresa was expressly permitted by our debt documents.”

A hearing on the matter is set for Thursday.

NMG operates Neiman Marcus, Bergdorf Goodman, Neiman Marcus Last Call and Horchow, as well as Mytheresa.

Marble Ridge contends that “several hundred million dollars of value are being stripped from NMG” for the benefit of the owners, and that the company is enabling securities holders (including creditors who hold credit default swaps) to benefit from the company’s failure at some point in the future while the owners are released from potential claims.