* Distressed exchanges, PIK threaten unsecured creditors
By Davide Scigliuzzo
NEW YORK, March 17 (IFR) - Troubled retailer Neiman Marcus
is considering an outright sale of the company, but that would
be likely to prove extremely costly unless bond or equity
holders take steep losses.
Two months after abandoning an IPO, the luxury chain
revealed dismal results and said it was exploring options,
including a sale or an overhaul of its capital structure.
The bleak outlook initially sent the company's 8% and 8.75%
bonds plummeting to record lows of 53 and 49 cents on Tuesday.
But they later rallied on a Wall Street Journal report that
Hudson's Bay, the owner of Neiman rival Saks Fifth Avenue, was
in talks to buy the business.
By Thursday, the bonds were back at 59.5 and 55.125.
But that rebound was puzzling to some, who said that the
company's fundamentals remain poor and that it is still groaning
under a debt load, including loans, of US$4.7bn.
"If I were interested in the assets, I would wait for
results to deteriorate further, let the company work out some
liability management ... and then come in and buy some pieces,"
Jenna Giannelli, an analyst at Citigroup, told IFR.
Some analysts said that if debt and equity holders took no
losses at all, an acquirer would pay more than US$6bn for the
whole company, for an eye-popping valuation of 12 to 14 times
That would be well above the 9.7 times multiple paid by TPG
and Warburg Pincus when they took Neiman private in 2005, and
the 8.9 times multiple paid by Ares Management and Canada
Pension Plan Investment Board in the company's second buyout in
2013, according to Giannelli's calculations.
Even a significant haircut on the bonds - as much as 60%,
which is well below current trading levels - would still mean a
huge multiple of just below 12 times, Giannelli said.
At that level, the company's term loan holders - or its
private equity sponsors - might also have to share some of the
pain to make a purchase feasible, she said.
"Neiman is still a tough story," said Duncan Vise, an
analyst at Invesco. "It is difficult to understand how a
transaction could be structured."
Acquiring a stake of less than 50% in Neiman, purchasing
individual assets or even setting up a joint venture for some of
the retailer's businesses might be more realistic, JP Morgan
analyst Carla Casella wrote in a note.
Structuring a deal that would avoid a full redemption of the
roughly US$1.56bn of outstanding bonds would also seem to be
The bonds, sold in 2013 to help finance the last buyout,
include change of control language requiring any buyer to
purchase the entire business, or substantially all of its
assets, to redeem the bonds at 101 - a huge premium to current
According to independent research firm Covenant Review,
however, any acquirer - as long as no person or group owns more
than 50% of its voting stock - could take over Neiman without
triggering the CoC.
And Hudson's Bay fits that bill, it said.
But a sale without a haircut on the debt would be a leap -
particularly as Neiman is nearly 10 times leveraged - and some
analysts believe a distressed exchange is all but inevitable.
Indeed, some of Neiman's recent actions point to that
When its quarterly results were announced on Tuesday, Neiman
said it had moved its online mytheresa.com business, two stores
and one distribution centre to an unrestricted subsidiary.
A full exchange of the bonds into new secured notes issued
by that subsidiary - whose assets Giannelli values at around
US$500m - could leave bondholders with recoveries in the
That would be way below the bonds' current prices.
But to sweeten any potential offer, Neiman could issue more
notes through its main corporate entity - where it has capacity
to raise an additional US$1.4bn of secured debt - or add
proceeds from asset sales.
Investors waiting for an entry point in Neiman's capital
structure are now trying to work out the bonds' valuations.
"It is very hard to determine how much the bonds are worth,"
said Mike Terwilliger, a portfolio manager at Resource America.
"There are a lot of levers the company can use to try to
extract value from bondholders, such as a distressed exchange
under the threat of a bankruptcy."
Neiman could defer coupon payments on its existing
payment-in-kind 8.75% bonds by adding a slightly higher interest
payment to the principal, rather than paying cash now - a move
that would be likely to cause those notes to trade down and
allow the company to offer a lower price in the exchange.
"PIK bondholders may [have a bigger incentive] to
participate in a bond exchange if they are receiving PIK rather
than cash interest payments," analysts at Goldman Sachs wrote in
a recent note.
That would not be uncharted territory for Neiman. In 2009,
the company elected to pay its bonds in kind for three quarters
after facing a 30% decline in same-store sales.
But there are only three more coupon payments for which
Neiman has this option - October 2017, April 2018 and October
2018. It must decide by April 15 if it wants to exercise the
option in October.