More Shenanigans in Retail: Neiman Marcus Edition

Retail Schmetail (Long Shenanigans; Long Litigation-Based Investment)

Just when retail was starting to get boring, Neiman Marcus stepped up this week to provide some real entertainment for bond investors. Thanks Neiman Marcus!

First, lending an additional boost the now-popular narrative that the "#retailapocalypse story is over, the luxury department store retailer reported earnings on September 18 that reflected (i) a 2.3% increase in quarterly revenue YOY, (ii) a dramatically reduced Q4 net loss on a YOY basis, and (iii) an increase in adjusted EBITDA. For fiscal year 2018, it reported total revenues of $4.9 billion, a 4.9% increase YOY. Free cash flow was $122.6mm vs. negative $57.7mm last year. Online revenues were up 12.5% for the quarter and accounted for 35% of the overall business.

And that last bit is where the rubber meets the road. At the tail end of its press release, Neiman slipped in this doozy like a slickster:

Subsequent to the end of the fourth quarter, the Company effected an organizational change as a result of which the entities through which the Company operates the MyTheresa business now sit directly under Neiman Marcus Group, Inc., the Company’s ultimate parent entity. These entities were unrestricted, non-guarantor subsidiaries under the Company’s debt instruments. As a result of this change, going forward the financial results of the MyTheresa entities will no longer be included in the Company’s publicly reported financial statements. The change is not expected to meaningfully affect operations for Neiman Marcus or MyTheresa.

Indeed, the company’s term loan and bonds — part of its $4.7 billion debt stack — did trade down but it wasn’t due to misplaced optimism. Rather, it was more likely attributable to the fact that the company, in a Petsmart-PTSD-inducing maneuver, just significantly weakened the bondholder collateral package.

Per the Wall Street Journal:

Before the transfer of MyTheresa to the parent company, Neiman Marcus Group Inc., there was some anticipation that the retailer would use the MyTheresa shares to entice bondholders to swap their debt for bonds with a longer maturity.

“Some bondholders may have incorrectly assumed that the company would embark on a distressed debt exchange involving MyTheresa shares as collateral,” said Steven Ruggiero, an analyst at Pressprich & Co.

It appears so.

James Goldstein, a retail analyst at CreditSights, noted that proceeds from any sale could now go directly to the investment companies that control the Neiman parent company, with bondholders likely having no claim. The parent company is owned by Ares Management LP and the Canada Pension Plan Investment Board.

“MyTheresa was already in an unrestricted subsidiary, but the way it’s structured now proceeds of any sale of MyTheresa goes straight to sponsors’ pockets without having to deal with the bondholders,” Mr. Goldstein said.

For now, this is a (potential) win for pensioners and a loss for hedge funds holding the debt. And one such hedge fund was, shall we say, a wee bit nonplussed. On Friday September 21, Marble Ridge Capital LP sent a letter to the company’s board of directors (and subsequently issued a very public press release about said letter) stating:

"…what these transactions appear to be is an attempt to move the MyTheresa business beyond the reach of existing creditors sitting between the sponsors' equity and the valuable MyTheresa assets. Most troubling, we understand that Ares and CPPIB usurped this massive benefit and took the MyTheresa business for no consideration."

"Marble Ridge has reason to believe that the Company was insolvent at the time of the Transactions or was rendered insolvent thereby. The Company is the issuer and/or guarantor of at least $4.7 billion of indebtedness. Based on LTM EBITDA of $478.2 million, the Company's indebtedness prior to the Transactions implies nearly a 10x leverage multiple (far in excess of any of its peers). Moreover, a dividend or other form of a spinoff by an insolvent guarantor to its equity sponsors, for no consideration, has all the hallmarks of an intentional or constructive fraudulent transfer (or illegal dividend) and raises serious questions of breaches of duties of care and loyalty, with exposure for Ares and CPPIB, as controlling shareholders, and for the Company's board. As noted above, Marble Ridge also has concerns that the Transactions do not comply with the Indentures."

The Wall Street Journal had previously reported that:

Neiman Marcus hired Lazard Ltd. and Kirkland & Ellis last year for advice on how to restructure its debt.

Looks like they deployed some of that advice.

That Escalated Quickly: Toys R' Us Continues to Fade...

Distressed Investors and Private Equity Owners Seemingly Surprised

People can't seem to get enough of it and so we'll lead again with...you guessed it...Toys R' Us. Let's warm you up with a brief history lesson. Last week we speculated that supplier concerns were turning a stressed situation into a distressed situation. Looks like we may have been right. And so investors who may have been caught off guard are sending CDS coverage flying through the roof in an effort to hedge the value of rapidly declining debt holdings. Speaking of investors who may be worried...CMBS anyone? Now, rumors are that Alvarez & Marsal LLCand Prime Clerk LLC have been hired by the company to complement the previous retentions of Kirkland & Ellis LLP and Lazard Ltd. The smart money seems to think that that full array of professional retentions means a bankruptcy filing is IMMINENT. Alternatively, perhaps the public's newfound awareness of that full array of professional retentions means a bankruptcy filing is imminent. These things have a way of being self-fulfilling. Especially if vendors are paying attention. And it certainly seems like they are. Meanwhile, query what this all means for Vornado Realty Trust ($VNO). Sheesh. Anyway, we're old enough to remember when there was talk of an IPO. 

Geoffrey is on the Ropes: Toys R' Us is in Trouble

Private Equity Backed Retail is in the Dumps

"No Reason to Exist" - Restructuring Banker

Big news this week was CNBC's report that Toys R' Us hired Kirkland & Ellis LLP to complement Lazard ($LAZ) in a potential restructuring transaction.* This was followed by an S&P downgrade (firewall). This is "Death by self-commoditization," someone said. Sure, that's part of it but the more obvious and immediate explanation is the $5+ billion of debt the company is carrying on its balance sheet (and the millions of dollars of annual interest payments). Which, naturally, quickly gets us to private equity: KKR ($KKR), Bain and Vornado Realty Trust ($VNO) own Toys R' Us and so some are quick to blame those PRIVATE EQUITY shops for YET ANOTHER retailer hitting the skids. Post-LBO, this company simply never could grow into its capital structure given (i) the power of the big box retailers (e.g., Walmart ($WMT) & Target ($TGT)) and (ii) headwinds confronting specialty brick-and-mortar retail today (yeah, yeah, blah, blah, Amazon). That said, the gravity of the near-term maturity, the company's current cash position, and the bond trading levels don't necessarily scream imminent bankruptcy. There must be more to this. Speculating here, but this could just be an international value grab. Alternatively, given the tremendous amount of blood in the (retail) waters, we're betting that suppliers are squeezing the company. Badly. Like very badly. And/or maybe the company is trying to scare its landlords into concessions. We mean, seriously, we're in September. And the company is talking about bankruptcy NOW? Mere months from peak (holiday) toy shopping? Strikes us as odd. Someone has an agenda here. 

On a positive note, we want to give the company some credit: it tried its best to control the narrative by releasing its list of must-have toys for the holidays on the same day the Kirkland news "leaked."

*For anyone taking notes, this is a genius stroke of business development by Lazard: pinpoint a potential distressed corporate candidate and then poach that company's Vice President of Corporate Finance. Power. Move. We dig it. 

Professional-Services.ai

Short junior attorneys...the machines are coming for them. And, frankly, why shouldn't they come for attorneys at ALL levels? After all, are there situations where there is "overzealous advocacy and hyperactive legal efforts"? When there are "so many attorneys and their respective billings"? "When the hourly rates and amount of time billed are simply unreasonable"? "Staggering," in fact?  Suffice it to say, you won't see Weil filing any cases in Southern District of Iowa anytime soon (see below). Frankly, "overzealous advocacy and hyperactive legal efforts" seems like it could have just as easily applied to the pissing contest that was the equitable subordination claim in Aeropostale but who are we to judge a grudge match between Weil and Kirkland & Ellis (which the the latter convincingly won)? We were too busy popping popcorn and putting our feet up. Switching gears and looking elsewhere in changing labor markets, here's to wondering: is the "gig economy" working? And what becomes of those 89,000 lost retail jobs?

Speaking of retail jobs, it looks like the bankers have all of them. Now there's M&A noise around Neiman Marcus, which is heating up with Hudson's Bay sniffing around hard but trying to avoid assumption of Neiman's substantial debt-load. Meanwhile Nine West Holdings has hired Lazard to figure out its capital structure. Elsewhere in retail, Macy's ($M), Kohl's ($KSS), Nordstrom ($JWN) and J.C. Penney ($JCP) all reported earnings that looked like a dumpster fire and the stocks promptly got decimated. We're sure the bankers are salivating. And speaking of retailers with jacked-up debt (and bankers), GNC Holdings Inc. and its agent bankers JPMorgan reportedly attempted but ultimately failed to extend GNC's $1.13b loan by three years. Now GNC says it will use its "strong" free cash flow to fund ops and deal with its '18 maturity. This is an interesting story on many levels. First, there have been a TON of share buybacks in recent years (the public equivalent of a dividend recap - our favorite) and so it was only a matter of time before one of them bit an uncreative and misled -- uh, we mean, generous shareholder-minded - management team in the bum. Second, the "Amazon-effect" apparently applies to meatheads too with vitamin sales allegedly shifting online. Who knew Biff could function in an m-commerce world? Go Biff. Third, despite a variety of downward trending financials, GNC's loan is still trading at a tick below par and so the proposed transaction might have affected the lenders' yield metrics (hence the rejection). Which gets us to #4: with crappy loans like GNC's ticking up so far upward, most distressed players can't stop complaining about a dearth of opportunities to target: everything is priced to perfection. Sadly, everyone needs the yield wherever they can get it hoping (praying?) that when the going gets rough, they'll be the first to hit eject. No, no (rate-fueled) bubble to see here.