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Will a White Knight Write Neiman’s Next Chapter?

Hudson’s Bay Co. chairman Richard Baker has had his eyes on Neiman Marcus for years, and a bankruptcy filing for the luxury retailer could be his chance to seize a long-held dream.

With a missed interest payment this past week, and likely just a short grace period to make good on the debt obligation, a Neiman Marcus bankruptcy filing is expected to be close at hand. In addition to the missed payment, the luxury retailer also has $115 million in debt coming due before the end of April.

One source said on Friday that a filing is expected soon and that it could be within days. One snag has been finalizing the details on debtor-in-possession financing with lenders. Another source said that because stores are closed, one complication might be that Neiman can’t open its doors to conduct the usual sales at stores where it might want to close to exit certain leases. That said, the luxury retailer, which also operates two Bergdorf Goodman stores in Manhattan, has been running promotions online, sending e-mails out noting special promotions, as well as offers over the last few weeks of $500 and $600 gift cards for use down the road if certain purchasing requirements are met. Neiman last month said it would shutter most of its Last Call outlet doors to focus on its more lucrative full-line business.

Other observers believe that the missed payment indicates the retailer also could be looking to build up its cash base ahead of a filing. Chatter surfaced over the past two weeks that Richard Baker, Hudson’s Bay Co. chairman, is setting his sights–again–on the luxury retailer.

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A spokesman for Baker and HBC did not return a request for comment. A spokesman for Neiman Marcus also declined comment.

Baker’s supposed interest wouldn’t be his first look at taking over the luxury retailer, which is seen as complementing the HBC portfolio and its Saks Fifth Avenue property. Three years ago, Macy’s spurned his overture to buy the aging department store company. Two months later, he turned his attention to Neiman Marcus, which had put itself on the market after scrapping plans for an initial public offering.

Baker tapped investment bank Evercore Partners Inc. as an advisor but a hoped-for deal ran into the stumbling block of Neiman’s high level of debt, which the HBC executive would have had to assume if he were to pursue an acquisition. At the time Neiman’s debt obligations totaled roughly $4.7 billion, a sum too high to couple with the $2.5 billion HBC itself owed.

Neiman’s racked up billions in debt from two leveraged buyouts, the first of which came in 2005 when TPG Capital and Warburg Pincus, both private equity firms, acquired the luxury retailer for $5.1 billion. They sold their stake in 2013 for $6 billion to private equity firm Ares Management and the Canada Pension Plan Investment Board. Neiman’s management team at the time is believed to have taken a minority stake in the retailer.

But it’s the more recent LBO deal that bloated Neiman’s debt load. After a debt restructuring in June that pushed off some due dates for its debt obligations, and included a second-lien note offering and debt exchange, the luxury retailer restarted talks earlier this year in connection to another debt restructuring, but then found itself with a cash crunch after shuttering its stores last month under social-distancing mandates brought on by the coronavirus pandemic.

Last week, credit ratings firm S&P Global Ratings group downgraded Neiman’s credit rating, citing its unsustainable capital structure. The retailer’s corporate bonds, already in junk territory, were dropped down one notch further.

“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.

Neiman’s last month furloughed most of its 14,000 workers, leaving just a small quorum to handle online fulfillment. And it put up for sale two Texas distribution centers in Longview and in Las Colinas that it no longer needs. The retailer is also trying to offload luxury fashion e-commerce platform

If Baker was scared off by Neiman’s high debt load two years ago, then there’s a chance he could find that Neiman’s could be had on the relatively cheap side given the retailer’s distressed balance sheet. But there’s the possibility he could run into trouble coming up with the funds to push ahead on that long-sought dream. One financier, who said Baker is circling around Neiman’s again, also noted that he has a penchant for waiting quietly until he can acquire what he wants at “the right price.”

Neiman’s isn’t the only retailer trying to figure out how to handle debt payments. J.C. Penney Co. Inc., which also missed a $12 million interest payment last week, is similarly in ongoing talks to explore the best option for its future. While bankruptcy has been discussed, it isn’t the only option on the table, the source said, emphasizing that a “bankruptcy is not inevitable.”

Other retailers in better shape have already drawn down on credit lines to build up cash reserves, or have started raising additional funding through private placements of senior notes due 2025. Cash has been a problem for all brick-and-mortar-based fashion retailers forced to idle stores in the wake of COVID-19. While online platforms remain open for business, those sales don’t even come close to what a retailer can rake in when its brick-and-mortar stores are open.