By
with contributions from Evan Clark
 on March 25, 2020
What to Know About Neiman Marcus' Potential Bankruptcy

Neiman Marcus Group is walking an ultra fine line.

For the luxury retailer, severely impacted by its heavy debt load and the coronavirus pandemic, a bankruptcy filing is still weeks away while alternative strategies to keep the company alive remain on the table.

NMG is in active talks with its different constituencies, including lenders holding the debt as well as those that could provide debtor-in-possession financing for a possible bankruptcy. The retailer, responding to reports of a possible bankruptcy, said Tuesday it’s examining various strategies to insure its financial well-being and continuing operations. The company would not comment specifically on a bankruptcy or alternative strategies, and said it’s “evaluating all courses of action.”

Retail analysts believe a bankruptcy that enables the company to shed debt, downsize and keep operating is the most likely scenario.

Less likely scenarios are selling off parts of the business, such as Bergdorf Goodman and the Mytheresa luxury web site (which it already was trying to sell) to raise money, or working with debt holders on obtaining some level of forgiveness or extensions on loans while attempting to weather through the pandemic by aggressively cutting payroll, SG&A costs, closing stores, and using whatever support the government provides retailers, without going bankrupt. NMG could be close to, or already, tripping covenants with lenders.

Most, but not all, analysts and sources contacted rule out a liquidation since stores are closed due to the pandemic, there’s no telling yet when they might reopen, and Neiman’s is intent on staying in business.

Lining up bankruptcy financing would take at least two weeks, according to industry and financial sources. Despite the disruptions caused by the coronavirus, a bankruptcy court filing could be made online, according to legal experts.

NMG 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.

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

“Most businesses today are facing some degree of disruption from the unprecedented global economic environment resulting from the COVID-19 pandemic. We are evaluating all courses of action to preserve our financial strength so that we may continue serving our customers and associates, and being a great partner to luxury brands globally,” a NMG spokeswoman said Tuesday morning.

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“Our priority has been and will always be to ensure stability for our associates and brand partners.”

One source familiar with the situation said it was still “super early innings” for the process, but that things were moving fast and that a bankruptcy filing could come in as soon as two weeks or as long as six.

NMG has for some time been working with law firm Kirkland & Ellis and restructuring specialist Lazard and holding tentative talks with the three main investors holding the company’s term loan. Neither Kirkland nor Lazard responded to a request for comment Tuesday.

The general idea is to get the term loan holders to pony up the debtor-in-possession necessary for the retailer to operate while in bankruptcy, a source said.

“The term loan lenders have to defend their position,” the source said, mapping out how the process could play out. “If they don’t put up the DIP financing right now — and there’s going to be a real liquidity need given the stores are closed — it will be an immediate liquidation.”

Stepping in as lenders during a bankruptcy would give the term loan holders more say in how the process plays out.

NMG is still seen as a valuable and viable business, just stuck under a mountain of debt. And while it is exploring other options, the consensus among most financial experts is that the COVID-19 shutdown is just too much for it to ultimately endure since it has choked off the company at both ends, disrupting supply and the consumer side of the business.

But even though the company has been on distressed debt watch lists for years as it struggled to pay off debt tied to two consecutive private equity buyouts, any bankruptcy filing by NMG could be just the start of a wave of Chapter 11’s among fashion retailers selling non-essentials exacerbated by the global health crisis. Most vulnerable are those with weak operations or heavy debt loads, or those catering to middle or lower income groups which would be more financially hurt by the pandemic than upscale consumers.

Even before the coronavirus outbreak, there was speculation Neiman’s could be a bankruptcy candidate. The retailer did show some improved selling trends last year but decided to discontinue publicly reporting its financial performance regularly, decreasing visibility into its operating results. Bloomberg first reported Monday evening that NMG was considering a possible bankruptcy but that no decision has been made.

A Neiman’s bankruptcy would be an opportune time for Hudson’s Bay Co. — operator of Saks Fifth Avenue, Saks Off 5th and Hudson’s Bay — to pursue a takeover. It’s no secret that Richard Baker, executive chairman and chief executive officer of HBC, has long been interested in combining Saks and Neiman’s to create a dominant North American luxury retailer. A bankruptcy would bring the price on Neiman’s down, though retail sources question whether Baker could raise the money required to buy NMG, considering HBC has its own operating difficulties and has been losing money, and much was spent to take the company private this month at 11 Canadian dollars a share. Baker has a track record for devising innovative financial deals and partnerships.

“Absolutely, Richard would go after Neiman’s, even if the virus hasn’t subsided yet. He could still be able to reduce costs through synergies of combining the businesses,” said one former high-ranking retailer, who requested anonymity. “If he could get the business now, he would do it in a minute, but he’s not going to go after Neiman’s until they do a restructuring. Richard has been talking to the owners for ages.”

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“I think it’s going to happen,” said Walter Loeb of Loeb Associates, when asked if he thinks NMG will go bankrupt. “There’s over $4 billion in debt and no money is coming in. I believe they explored a partnership with Saks Fifth Avenue several times but in the current environment with the coronavirus, it became impossible. It saddens me that a company of this quality is coming to this. Neiman’s will be a smaller, more manageable company as a result.”

“Neiman’s has three choices,” said Eric Snyder, partner at New York City-based law firm Wilk Auslander, and chairman of the firm’s bankruptcy department. “Neiman’s could reorganize, or liquidate and go the way of Barneys and other retailers, or try to do a sale as a going concern. But you can’t have a going-out-of-business sale because everyone is locked down,” due to COVID-19. “And I don’t think anyone can bid if you don’t know when you are going to start operating again. I don’t see any buyers out there at this point because of the uncertainty of the lockdowns. At this point, until there’s more clarity [about the pandemic], nothing is going to happen in the next few weeks. But they will be reaching out to lenders and studying their restructuring options. Of the three choices, using the bankruptcy process to cut debt and stay in business, that’s their best alternative.”

Snyder said that despite the disruption caused by the pandemic, it’s possible to file for bankruptcy. “That’s not an issue. It’s all done online. The issue in this environment is getting debtor-in-possession financing.”

“You always need to look at a chain and say, ‘Do they have a reason to be, should they exist?’” said Antony Karabus, ceo of HRC Retail Advisory. “Neiman’s 100 percent has a reason to be, it’s a uniquely differentiated business, which has a very loyal and deep trust with a client base that is the most discerning clientele in the industry, in the country.

“It would be unimaginable for me if Neiman’s were to go away,”  Karabus said. “I believe there’s a financial problem that needs to be worked out, but that Neiman’s should be a part of our lives for a long time to come.”

There’s no certainty that NMG will go bankrupt. In the event of a bankruptcy, its owners, Ares and CPPIB, would wipe out their investment in the business for pennies on the dollar.

Also, lenders are likely to be more forgiving considering the challenges created by the pandemic, and allow for more time to pay off debt and see if Neiman’s, post-pandemic, can improve business performance.

The impact of the pandemic on business is often compared to the Great Recession. During those years, NMG saw its volume sink by about one-third. As the stock market goes, so goes the spending at Neiman’s, Bergdorf’s and other luxury retailers. Affluent consumers do curtail their high-end shopping when Wall Street tanks.

NMG, led by ceo Geoffroy van Raemdonck, is in the midst of a four-year “transformation” plan intended to create a “luxury customer platform” involving becoming  “seamlessly” multichannel, delivering new kinds of experiences and products — fashion and nonfashion — no longer being considered simply a department store business, sharpening the focus on full-price selling, personalization and strengthening customer relationships. The plan also targets those spending less than $10,000 annually at its stores and web sites and to win over new customers, while still focused on much bigger spenders. Van Raemdonck launched the transformation plan in August 2018, but a bankruptcy would likely derail the transformation effort.

The company is also streamlining, and closing most of its 22 Last Call clearance outlets. The retailer earlier this month said it’s letting go of about 500 Last Call workers, and another 250 associates or so at Neiman’s department stores though some new roles would be created for team and client development. NMG has 13,700 corporate and store associates.

In addition, NMG is considering selling two distribution centers, in Longview and Las Colinas, Tex. NMG also has distribution centers in Pittston, Pa.; Whittier, Calif., and a third in Pinnacle Park in the Dallas area.

To protect workers, customers and the business itself from the pandemic, NMG has temporarily closed all stores, told associates to work from home and is encouraging them to contact their senators and urge them to support the retail industry during the COVID-19 crisis.

Additionally, NMG is partnering with Joann Stores to produce nonsurgical, personal protective equipment including masks, gowns and scrubs for front-line health-care providers. Alterations departments will receive product from Joann Stores to create the equipment. While these materials are not medical grade, Jo-Ann Fabric secured patterns and templates and is shipping fabric and materials recommended for medical settings, including the guidelines provided by the Providence Hospital System in Washington. While social distancing, NMG’s alterations specialists will create these products. Because of the critical shortage, health authorities and hospitals have changed guidelines for what level of protection is recommended. The CDC says homemade fabric masks are a crisis response option when other supplies have been exhausted. NMG and Joann will cover the cost of shipping and delivery.

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