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Neiman Marcus Bankruptcy Filing Likely Over Next Six Months: S&P

Neiman Marcus is the latest department store operator to see its credit ratings suffer.

The S&P Global Ratings group downgraded The Neiman Marcus Group LLC’s credit rating, citing its unsustainable capital structure and a growing expectation that the debt-laden chain will file for bankruptcy or undertake a restructuring.

The over-leveraged Dallas-based luxury department store firm’s corporate bonds were already in junk territory, meaning a debt investment is considered high risk. That rating at “CCC” was dropped on Tuesday to “CCC-,” with the credit ratings firm noting that the negative outlook reflects the “elevated potential” that the company will undergo a restructuring this year. S&P is presuming either a bankruptcy filing or a restructuring “likely in the next six months.”

“Neiman Marcus has remained highly leveraged for several years and depends on favorable market conditions and strong execution to sustain its capital structure. In light of the significant headwinds stemming from the coronavirus pandemic and our expectations for a U.S. recession this year, we believe the company’s prospects for a turnaround are increasingly low,” the ratings firm said.

In June, S&P called attention to the luxury retailer’s debt restructuring, which included a second-lien note offering and a debt exchange. At the time, the firm said it viewed the restructuring as “distressed,” noting that it did nothing to reduce Neiman’s nominal debt level.

“We could raise our ratings on Neiman if its performance improves and we see a pathway for it to refinance its onerous capital structure at par. This would include the nearly $138 million of unsecured debt due October 2021,” S&P said.

Word surfaced last month that Neiman’s was holding discussions with bondholders and lenders, with talks centering over financing in the event the company were to operate under bankruptcy court protection. There’s still the possibility the retailer could still work out an arrangement with both parties that includes another distressed debt exchange that extends out its debt payments outside of a bankruptcy filing.

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The company has already furloughed most of its employees due to temporary store closures triggered by the coronavirus outbreak.

Some executives in the factoring and financial community believe that the retailer is scrambling to stave off a bankruptcy filing. “They are making some payments to vendors. If they were thinking more along the lines of a bankruptcy, they would avoid paying completely and hold on to the cash instead,” one lender said. Another called Neiman’s debt load “horrendous,” and said the retailer will survive the pandemic, even if that might mean filing for Chapter 11 in order to escape from its current debt structure.

Neiman Marcus was acquired by private equity firms TPG and Warburg Pincus in 2005 for $5.1 billion. The two decided against an initial public offering and instead exited their investment when they sold Neiman to two investors–private equity firm Ares Management and the Canada Pension Plan Investment Board–for $6 billion in 2013. Neiman’s existing management team at the time also took on an undisclosed minority stake in the company.

Both acquisitions were leveraged buyouts. But it’s the last one that inflated the debt load on the retailer’s balance sheet at a time when consumers were heading to newer digitally native luxury players. Consumers were also discovering the resale market trend that saw younger buyers on the hunt for pre-owned designer apparel and accessories instead of their higher-priced, new-season counterpart. That had the retailer shifting gears to adapt to the changing retail landscape, whether it was to enter into a long-term partnership with Rent the Runway for shop-in-shops, its acquisition of online luxury retailer MyTheresa in 2014 for 150 million euros (about $193.5 million) or taking on a minority stake in pre-owned handbag e-tailer Fashionphile in 2019.

Neiman considered selling MyTheresa last year but just months ago was planning on an IPO for the online platform before COVID-19 struck. Last month, the retailer said it was shuttering most of its Last Call discount stores.