Neiman nettlesome for CPPIB

Retailer hires adviser for debt restructuring

Three plus years on, the US$6-billion purchase of the Neiman Marcus Group by Canada Pension Plan Investment Board and Ares Management, is not exactly looking like a stellar acquisition.

In the most recent setback, the luxury retailer — which operates 41 Neiman Marcus Stores, two Bergdorf Goodman stores in Manhattan and 36 Last Call outlet centres — has, according to reports, hired a debt-restructuring adviser.

The company has retained Lazard Ltd. “to explore ways to bolster its balance sheet as it seeks relief from US$4.9 billion in debt.” The report indicated Neiman Marcus is the highest profile U.S. retailer to have retained such an adviser — though the company is in no immediate danger of going bankrupt.

That development comes about two months after the company withdrew its plans to go public.

In August, 2015, it filed a registration statement for an initial public offering, indicating, for nominal purposes, that it intended to raise US$100 million.

In early January it withdrew that IPO registration. “The Company has determined that it is not in its best interests to proceed with the initial public offering contemplated by the Registration Statement at this time,” it said according to the EDGAR filing. Despite being a private company Neiman Marcus does release quarterly financial statements.

Hiring a debt-restructuring adviser probably wasn’t a great surprise to the highyield analysts at Wells Fargo. In a report released in February, the firm noted Neiman Marcus “has been the most topical name in high-yield retail this year as investors face fears of short-term earnings pressures combined with questions about the company’s long-term outlook and its highly leveraged balance sheet.”

In that report Wells Fargo downgraded the credit rating on three of the four high-yield securities issued by Neiman Marcus to underperform from market perform because of execution issues and competitive pressures. “EBITDA must recover significantly to provide attractive recovery value for unsecured bondholders,” it noted.

As for the private equity sponsors, the report said that it will be difficult for them “to recoup value from their investment based on the company’s lower rate of EBITDA and pressure on valuation multiples in the retail sector.”

Part of the 13-page report was devoted to ways the sponsors could extract value. Aside from an outright sale of the two well-known retail brands, the report mentioned three possibilities: an intellectual property transfer (a method recently used by J Crew); a distressed bond exchange into secured debt; or the possible payment in kind. Those negative possibilities contrast with the bullish sentiment expressed at the time when CPPIB and Ares became joint owners of Neiman Marcus.

“We believe the company’s strong market position, combined with an expected increase in U.S. luxury goods spending, provide attractive opportunities for future growth,” CPPIB said at the time when it was making one of its largestever single investments to date. (CCPIB’s largest investment is the US$3.9 billion it invested in Chicago-based Antares Capital in 2015. It owns about 100 per cent of Antares, which provides financing solutions “to middle market private equity sponsors in North America.”)

CPPIB, which as part of the purchase price of Neiman Marcus, invested US$1.6 billion of equity, declined to comment on the state of affairs.