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Neiman Marcus Poised For Credit Downgrade

In anticipation of a potential downgrade, both Moody’s Investors Service and Standard & Poor’s are reviewing Neiman Marcus Group (NMG).

The review revolves around the decision of NMG’s owners, TPG and Warburg Pincus, to sell the company to Ares Management and the Canadian Pension Plan Investment Board.  The concern for both ratings agencies is that the $6 billion leveraged buyout will pulverize the company with an unsustainable freight of debt.

S&P placed NMG’s “B+” rating on “credit watch,” saying, “We believe the company would add additional debt to its balance sheet because of the acquisition.”

Also, Moody’s placed NMG’s “corporate family credit rating” on review for a potential downgrade, also citing the expectation that the purchase will involve the subsumption of considerable debt: “Although the capital structure to finance the transaction has not yet been determined, Moody’s expects that the transaction will be largely financed with debt as is typical for most leveraged buyouts. This will likely result in NMG’s credit metrics deteriorating to levels that are indicative of a lower rating.”

NMG has suffered from a palsied economy that has left consumers wary of purchasing big ticket luxury items, the retailer’s bread and butter. Walter Loeb, president of Loeb Associates, explained, “It is a difficult environment for luxury companies these days because we’ve seen fewer foreign visitors and the domestic shopper is carefully cutting back because of the uncertainty.”

In 2012, luxury spending in the US grew 5 percent, less than half the expansion of the previous year.

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Many contend Warburg and TPG were not prepared for the global slowdown when they initially decided to purchase NMG. They paid approximately $5.1 billion in 2005 for the company in the midst of a historically impressive luxury items boom. Then, the world went dark in 2008.

Michael Appel, founder of Appel Associates LLC, said, “They didn’t expect 2008 to 2011 to happen. There was this hiatus there with what happened with the Great Recession. It took a period of time for them to get it back on track so that they could be ready to market it.”

Some experts still think NMG is well positioned to do well. In 2012, its revenue increased a healthy 8.6% to $4.35 billion and its net income jumped to $140.1 million, more than four times the previous year. Steven Dennis, founder of SageBerry Consulting LLC, said, “The operation is very well run, so I don’t think you can squeeze out a lot of new productivity. The question is how do you get more things out of the core business and are there other things that could create new growth platforms for them? That’s not obvious to me.”

Dennis continued, stating “there is a trophy value to owning an asset like Neiman Marcus. Barring a recession, it’s a stable, easy-to-understand business with reliable cash flows.”

Nevertheless, a credit downgrade could have a major impact on NMG’s success, possibly scaring off suppliers. The new owners have still laid out an aggressive and optimistic plan that includes significant investment over the next five years, international retail expansion and the introduction of lower priced goods to expand their customer base.