Neiman Marcus Group appears to be struggling through the early days of its bankruptcy, raising concerns about its ability to survive.
“They are desperately trying to conserve cash,” said one source close to Neiman’s bankruptcy case. Neiman Marcus filed for Chapter 11 bankruptcy earlier this month.
Other sources point out that Neiman’s, unlike its competitors, has yet to reopen any stores that were closed due to COVID-19, raising more questions about its cash position.
In Texas, historically a stronghold for Neiman’s, the company has no doors open yet for shoppers to come in, although the state has given retailers permission to open their doors. Saks Fifth Avenue and J.C. Penney Co. Inc. are among the retailers that have reopened stores in Texas.
Neiman’s also has key stores in Florida and Georgia, where stores have begun reopening, though Neiman’s hasn’t yet opened any stores in those states. Neiman’s is providing curbside pickups and by-appointment shopping in select locations around the country, where the state governments permit.
An e-mail to Neiman Marcus officials on Friday on the strategy for reopening stores around the country elicited no response as of Sunday.
In addition, the Dallas-based retailer may be in breach of its asset-backed loan agreement, based on what’s seen as an overestimation on the amount of its inventory.
Deutsche Bank AG New York Branch, the agent for the Neiman Marcus debtors’ pre-petition asset-back loan, on Friday filed a statement in bankruptcy court in Houston indicating “concerns regarding the current status of the court-approved ordered protections of the ABL lenders’ secured interest.”
Deutsche has found “material errors undermining key assumptions regarding the ABL lenders adequate protection.”
Sources noted that Neiman’s inventory, about one week after the petition date, was $159 million less than the budgeted amount in the initial debtor-in-possession budget, representing more than an 11 percent variance. The net eligible inventory was $65 million less than the budgeted amount, the sources said. The value of the inventory impacts Neiman’s borrowing ability.
The ABL credit agreement provided the debtors with access to aggregate revolving loan commitments of $900 million. The ABL credit agreement, like all asset-based loans, is structured so that the amount available for borrowing is regularly calibrated to the value of the specific set of collateral securing the loan. It is used for purchasing inventory.
Neiman Marcus filed for Chapter 11 bankruptcy on May 7, entering into the restructuring process with a $675 million debtor-in-possession loan and commitment from creditors for a $750 million exit financing package from creditors.
The ABL agent asserted in its filing that “just days after the petition date, the debtors were already in breach of the agreed-upon borrowing base formula set forth in the interim debtor-in-possession order, and the ABL lenders were significantly less protected than under the terms for which they had bargained.”
The statement does indicate that the debtors (Neiman Marcus) have proposed “to cure this breach by rebuilding the ABL borrowing base using $12 million from a segregated cash collateral account meant to guarantee a liquidity cushion as part of the ABL lenders adequate protection…the filing notes that $50 million was set aside.”
According to the filing, the ABL lenders’ anticipated level of protection — $89 million — is down to about $38 million, a 57 percent decrease from what was bargained for in the interim DIP order.
The ABL agent also said in the filing that if the ABL lenders are not restored to the level of protection that they thought they had, it will seek “relief from the court on an emergency basis.”
Some sources have raised the specter of a liquidation of the Neiman Marcus Group, although executives from the company have firmly stated it is their intention to emerge from bankruptcy as an ongoing operation.
It is also believed that Richard Baker, executive chairman of the Hudson’s Bay Co., is still very much interested in pursuing a takeover of the Neiman Marcus Group, and consolidate it into Saks Fifth Avenue. Significant synergies and cost savings could be generated through a combination of the two luxury retailers. But if the company ends up liquidating, HBC would be left with little to take over, possibly the intellectual property. When Barneys New York liquidated in February, HBC bought rights to the name from Barneys’ new owner Authentic Brands Group.
“Neiman’s is moving money around the table,” said the source close to the bankruptcy case. “The budget modeling is wrong, though in a pandemic, it’s tough for everyone.”
On June 8, New York City begins “phase one” of reopening the economy, meaning nonessential stores such as Saks, Macy’s and Bergdorf Goodman can offer curbside pickup of online orders in the city if they wish. Retailers are working out their plans. Phase two could start two weeks subsequent to June 8, depending on health metrics measuring COVID-19 cases in the city.