TEXT - S&P cuts The Neiman Marcus Group term loan ratings to 'B+'
Overview -- U.S. luxury department store The Neiman Marcus Group Inc. is issuing a $500 million senior secured incremental term loan. -- We are lowering the issue-level rating on the senior secured term loan to 'B+' from 'BB-' and revising the recovery rating to '3' from '2'. -- At the same time, we are affirming all other ratings on the company, including our 'B+' corporate credit rating. -- The stable outlook reflects our view that further strength in luxury retailing is likely to propel modest performance gains over the next year. Rating Action On Nov. 20, 2012, Standard & Poor's Ratings Services lowered its issue-level rating on The Neiman Marcus Group Inc.'s senior secured term loan to 'B+' from 'BB-' and revised the recovery rating to '3' from '2', indicating our expectation of meaningful (50% to 70%) recovery in the event of payment default. At the same time, we affirmed all other ratings, including the 'B+' corporate credit rating, on the company. Neiman Marcus plans to use the proceeds from the $500 million incremental term loan to repay its senior subordinated notes. Rationale The ratings on Dallas-based luxury retailer Neiman Marcus incorporate Standard & Poor's Ratings Services' assessment of a "fair" business risk profile and a "highly leveraged" financial risk profile. The company's business risk profile reflects its participation in the highly competitive department store sector, relatively narrow market compared with other department store operators, and small store base. Its solid position in the high-service, luxury merchandise specialty department store industry, strong vendor relationships, and improved operating performance over the past year somewhat offset these risks. In our view, Neiman Marcus has done a good job maintaining its customer service, reputation, and merchandise. The company ended another strong year with sales increasing 8.6%, primarily because of comparable sales of 7.9%. Margins strengthened to 14.4% on July 28, 2012, compared with 14.1% for the prior period because of solid full-priced selling. We expect revenue growth over the next year to be consistent with prior trends, but investments in infrastructure and technology to pressure margins slightly. Specifically, our assumptions over the next year include: -- Sales per square foot to increase in the mid-single digits. -- Total square feet to remain relatively flat. -- Direct marketing to increase in the low-double digits. -- Margins to demonstrate slight erosion over the next 12 months, based on continued investment in infrastructure and technology initiatives. -- Inventory growth in line with revenue increases. We assess the company's financial profile as highly leveraged and expect this to continue, so long as the company is owned by private equity. We believe that the company's very aggressive financial policies and the potential for additional dividends are likely to negate any sustained, meaningful improvement in credit protection metrics. We expect mid-single-digit growth in EBITDA over the next year to lower leverage to the low-5x area from 5.5x on July 28, 2012. We believe that interest coverage will increase to the low-3x range from 2.9x and funds from operations (FFO) to total debt is likely to remain in the low-double digits. Liquidity We assess Neiman Marcus' liquidity as "adequate," as we expect cash sources to exceed cash needs by at least 1.2x. The company's cash position declined meaningfully year-over-year to $49.3 million on July 28, 2012, from $321.6 million partly to fund the dividend payment of $449 million. We believe the company will use free operating cash flow of about $165 million over the next year to increase its cash on hand and repay a portion of the $100 million outstanding under its revolving credit facility. In our view, cash uses include about $180 million for capital expenditures and some modest investment in working capital. Other relevant aspects include: -- We estimate coverage of sources over uses will be above 1.2x. -- Net sources would be positive, even with a 15% decline in EBITDA. -- Neiman Marcus has sound relationships with its banks. -- There are no meaningful debt maturities over the next few years. Recovery analysis We rate the company's secured debt 'B+' with a recovery rating of '3', indicating our expectation of meaningful (50% to 70%) recovery for lenders in the event of a default. We rate the company's unsecured debt 'B-' with a recovery rating of '6', indicating our expectation of negligible (0% to 10%) recovery for lenders in the event of a default. For the complete recovery analysis, see Standard & Poor's recovery report on Neiman Marcus, published shortly after this report on RatingsDirect. Outlook Our stable rating outlook on Neiman Marcus reflects our expectation that performance gains will continue over the next year, with EBITDA growth in the mid-single digits. We expect further strength in luxury retailing to propel revenue gains in the upper-single digits, but margins to erode slightly because of investments in infrastructure and technology initiatives. In our view, the company's aggressive financial policies will negate any meaningful improvements in credit protection metrics over the long term. However, there could be some modest strengthening of metrics over the next year. Although unlikely over the next 12 months, we could raise our rating on the company if revenues rise in the upper-single digits and margins increase by over 75 basis points. Concurrently, the company would significantly moderate its future dividend policies. Under this scenario, leverage would be in the upper-4x area and interest coverage would be in the mid-3x area. We could lower the rating if performance slows substantially because of an unexpected drop in luxury retail spending or if the company increases the amount of future dividends and issues debt to fund them. Under this scenario, the company would issue debt above $600 million and use the proceeds to pay a dividend, leading to leverage of about 6x. Related Criteria And Research -- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 -- 2008 Corporate Criteria: Our Rating Process, April 15, 2008 -- 2008 Corporate Ratings Criteria: Ratios And Adjustments, April 15, 2008 Ratings List Ratings Affirmed; Recovery Rating Unchanged The Neiman Marcus Group Inc. Corporate Credit Rating B+/Stable/-- Subordinated B- Recovery Rating 6 Downgraded; Recovery Rating Revised To From The Neiman Marcus Group Inc. Senior Secured B+ BB- Recovery Rating 3 2 New Rating The Neiman Marcus Group Inc. Senior Secured US$500 mil incremental term bank ln B+ due 2018 Recovery Rating 3
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