Pedestrians cross Tenth Avenue near Neiman Marcus the retail store before the Hudson Yards Grand Opening Ceremony at Hudson Yards in New York, New York, USA, 15 March 2019. Hudson Yards is a real estate development on Manhattan's westside in the neighborhood of Chelsea, which will feature both residential and commercial space along with retail shopping, fine dining, a ten screen movie theater, a public school, and artist exhibition space.Grand Opening Hudson Yards New York, USA - 15 Mar 2019

The Neiman Marcus Group has defaulted on large interest payments on bonds that were due Wednesday, raising the specter of a bankruptcy filing soon, possibly within days.

Neiman’s does have a five-day grace period on $72.9 million in interest payment due on bonds maturing in 2024, but one creditor said the company is in “radio silence” and that he expects a filing within days. Also, $5.7 million in interest was due Wednesday on bonds maturing in 2021. Neiman’s has a 30-day grace period on that.

NMG has hired the Boston Consulting Group, which assists in restructurings. NMG’s chief executive officer Geoffroy Van Raemdonck was once employed by BCG.

“It’s in the best interests of the Neiman Marcus brand and its future and all parties involved if there is a Chapter 11 bankruptcy if possible,” said another source close to the situation. “You couldn’t really have a liquidation of the business in this marketplace,” said the source, referring to the impact of the coronavirus and all nonessential stores across the country being closed. However, Neiman’s and its sister division Bergdorf Goodman continue to operate their web sites.

“There are only three possible outcomes — the lenders operate the business, the business is sold to one party, or the business is liquidated,” said the source.

Neiman Marcus had no comment on the default or bankruptcy speculation. Neiman’s is technically in default now, even with the grace periods.

On Thursday, Daniel Kamensky, managing partner of Marble Ridge Capital, one of the bondholders, sent a letter to NMG’s chairman of the board David Kaplan, and general counsel Tracy Preston. “Neiman Marcus is now in default on its payment of interest obligations, and can no longer hide behind its protestations to the contrary. Accordingly, please be advised that Marble Ridge will take all necessary actions to protect its rights, including the right to seek all remedies, all of which are expressly preserved,” Kamensky wrote.

The letter cited “the improper transfer of the company’s crown-jewel, billion-dollar Mytheresa asset to the out-of-money sponsors for no consideration” leaving “a carcass of a company for the remaining shareholders and putting both Neiman’s storied franchise and thousands of jobs at risk.…Only an independent fiduciary can properly investigate the conduct of the parties involved and hold the appropriate parties accountable for their misdeeds,” Kamensky wrote.

Marble Ridge had previously argued in a court in Dallas, where NMG is based, that the owners of NMG wrongfully stripped Mytheresa from the company and shielded it from any creditor claims. Marble Ridge’s case was dismissed, however. Another legal skirmish could ensue, but it would most likely be up to a bankruptcy judge to determine the fate of Mytheresa.

NMG has been paying around $300 million in annual interest expense, dragging down its profitability and resulting in losses. The luxury retailer generates $5 billion in annual volume through its 43 Neiman’s stores, two Bergdorf Goodman stores, neimanmarcus.com, bergdorfgoodman.com, the Mytheresa luxury web site, the Horchow direct-to-consumer business and Last Call outlets.

Neiman Marcus Group is owned by Ares Management LLC and the Canada Pension Plan Investment Board, which together bought the business for $6 billion in 2013, bringing long-term debt up to $4.46 billion.

Even before the coronavirus outbreak, there was speculation that Neiman’s could be a bankruptcy candidate. The retailer did show some improved selling trends last year, but stopped publicly reporting its quarterly results.

Kamensky also wrote that last year it had retained Goldin Associates LLC “to advise on financial and valuation issues in connection with our analysis of Neiman Marcus.” According to the analysis, “at the time the Mytheresa assets were improperly stripped from the company in 2018, it was over 10 times levered, far in excess of its peers (which were levered closed to four times.) To make matters worse, last year’s debt restructuring increased the company’s already unsustainable annual interest expense by more than $100 million, leaving a fraction of adjusted EBITDA for any capital expenditures, principal repayment, taxes or onetime charges.”

Marble Ridge contends that NMG’s forecasts on earnings before interest, taxes, depreciation and amortization growth were “beyond fanciful and defied logic.” However, Neiman Marcus executives have repeatedly said the luxury retailer generates enough liquidity to cover interest obligations, though more recently, officials cited the impact of the coronavirus forcing NMG to close all of its stores in mid-March, also forcing the company to explore restructuring alternatives.

A bankruptcy filing would open NMG up to bids from potential new owners. And it’s no secret that Hudson’s Bay Co., led by Richard Baker, executive chairman, is expected to make a bid for the company. But there could be competing bids. Still, considering HBC owns Saks Fifth Avenue, Saks Off 5th and the Hudson’s Bay department store chain in Canada, Baker would be able to make a more compelling bid than a nonstrategic bidder, considering the possible synergies between HBC and NMG. It is also believed that Ares Management intends for NMG to keep operating and that it wants to retain some equity interest in the event of a takeover.

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