UPDATE 2-Neiman to cut 375 jobs, pay interest with more debt

(Adds job cuts, company and analyst comments.)

By Brad Dorfman

CHICAGO Jan 13 (Reuters) - Neiman Marcus Group Inc [NMRCUS.UL] will make interest payments for some senior notes due in 2015 by issuing more debt instead of paying cash, and the upscale retailer said it also planned to cut 375 jobs.

The moves are a way for the luxury department store operator to conserve cash and reduce costs in the recession.

Neiman said it was exercising a "payment-in-kind" option to cover interest payments due from Jan. 15 through April 14, according to a filing with the U.S. Securities and Exchange Commission.

The PIK option allows companies to conserve cash by deferring interest payments in favor of more debt. The move would save Neiman about $15 million a quarter, Standard & Poor's Ratings Services said in a statement.

Neiman's use of the PIK option "means their cash receipts are well below the comfort level to easily fund their interest payments," said Richard Hastings, consumer strategist at Global Hunter Securities.

Hastings noted that Neiman's sales have been weak over the past three months.

The company said last week that sales at its Neiman Marcus and Bergdorf Goodman stores open at least one year sank more than 31 percent in December during the industry's worst holiday shopping season in nearly four decades.

Exercising the PIK option does not necessarily mean a borrower is in trouble, but issuing more debt in lieu of making the interest payment can hurt a company's credit profile and make it more expensive to borrow in the future, Hastings said.

"You don't do the PIK payment option unless you have to," he said.

Neiman, which was acquired by a private equity group in 2005, cited "dislocation in the financial markets" for electing to use the PIK option, but added that it had $576.3 million in unused borrowing available under its $600 million revolving credit facility.

The company will decide whether or not to use the PIK option for future payment periods.

Neiman decided on the layoffs after it conducted a companywide review of its operations, spokeswoman Ginger Reeder said.

The 375 job cuts, about 3 percent of Neiman's workforce, will occur throughout the company, including corporate and store positions, she said.

The company did not quantify the interest payments it was deferring.

Neiman Marcus' 9 percent bonds due 2015 dropped almost 6 cents to 47 cents, before retracing back to 49 cents on the dollar, according to MarketAxess.

The company's decision to use the PIK option comes as other retailers rework terms on their credit agreements. Liz Claiborne Inc LIZ.N said on Tuesday that it had trimmed the amount of its revolving credit facilities and extended the maturity date to May 31, 2011 from October 2009. [ID:nN13382381] (Additional reporting by Karen Brettell in New York; Editing by Lisa Von Ahn)