Neiman Marcus Restructuring and the ill-famed myTheresa Spin-off

Welcome to the 115th Pari Passu newsletter. 

Over the last few months, we covered some landmark restructuring transactions including Red Lobster, Rite Aid, SunPower, and Hertz. Today, we are back with another all-time restructuring: The Neiman Marcus Group, Inc (NMG). 

With roots tracing back to 1907 in Dallas Texas, Neiman Marcus is a luxury fashion retailer primarily operating brick-and-mortar retail shops. The business traded hands several times, first acquired in 1969 by retailer Carter Hawley Hale, then spun-off in 1987 before being bought out by Warburg Pincus and TPG in October 2005. Eight years later, in October 2013, Neiman traded hands among PE sponsors and was bought out a second time by Ares and the Canadian Pension Plan Investment Board (CPPIB). 

It was with this latter sponsor group that Neiman gained prominence in the restructuring world. Utilizing a controversial drop-down maneuver facilitated by loose credit documents, Neiman shifted their valuable MyTheresa asset outside the “credit box”—to the benefit of their PE sponsors and detriment of creditors. By 2020, NMG dropped into bankruptcy court with a COVID-driven Chapter 11 with fraudulent transfer claims at their heels. 

From some hot-potato PE and a contentious drop-down LME, to a COVID-driven luxury retail bankruptcy, and criminal-bid-rigging charges, the drama of Neiman’s restructuring is unmatched, with implications reverberating throughout the restructuring arena. 

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Table of Contents

• Company Overview: Origins of Neiman

• 2005 LBO (ft. Warburg Pincus and TPG)

• 2013 SBO (ft. Ares and CPPIB)

• MyTheresa

• Drop-down: No Longer (our)Theresa

  • Step 1: Unrestricted Subsidiary Designation (2014)

  • STEP 2: Asset Stripping (September 2018)

  • Aftermath

• Operating Under COVID

• COVID-driven Chapter 11 (2020)

• Courtroom Drama Part 1: Fraudulent Transfer

• Courtroom Drama Part 2: Criminal Bid-Rigging

• So, What’s the Plan?

• What’s Next?

• Conclusion

• We are Hiring!

Company Overview: Origins of Neiman

“Neiman Marcus is Texas with a French accent” — Vogue, November 15, 1953, “Continental Chic in Texas” [16]

Founded in 1907 in Dallas, Texas by Herbert Marcus, Sr., his sister, Carrie Marcus Neiman, and her husband A.L. Neiman, Neiman Marcus is a leading luxury fashion retailer historically focused on brick-and-mortar shops. Boasting vendor arrangements with luxury brands including Chanel, Prada, and Gucci, Neiman operates by procuring and marketing inventory through their luxury storefronts, earning a margin on the goods. In 2018—the last disclosed annual financials before bankruptcy—Neiman saw $4.9bn of sales, $358mm EBITDA (7.3% margin), and $251mm of adjusted net income (5.1% margin). As evidenced by slim margins, the luxury retail industry is a competitive one, primarily competing on supplier relationships and inventory management. [1][16][BBG Terminal]

Prior to their 2020 bankruptcy, Neiman maintained over 5.1 million gross square feet of store operations in the U.S. By 2013, Neiman operated 43 Neiman Marcus stores (luxury retail), two Bergdorf Goodman stores (very luxury retail), and 24 smaller Last Call stores (“price-sensitive” luxury). [16]

As mentioned, Neiman Marcus has traded hands several times throughout its history. In 1969, it was acquired by Broadway-Hale for $40mm. In 1971, Broadway-Hale, later renamed Carter Hawley Hale, also acquired Bergdorf Goodman Company, one of New York City’s most respected retailers. Defending against a 1984 takeover attempt by borrowing $470mm to repurchase 51% of shares on open market landed Carter Hawley in deep waters, and by 1987, the struggling parent spun off Neiman Marcus, Bergdorf Goodman, and Contempo Casuals to form Neiman Marcus Group (NMG). By 1991, during the collapse of Milken’s junk bond market, Carter Hawley filed for Chapter 11 on February 11th 1991. It was eventually acquired in 1995 by Federated Department Stores, a predecessor to Macy’s, Inc., for $1.6bn. [17]

After several successful years of growth, NMG was bought out by Warburg Pincus and TPG in October 2005. The retailer again found itself a LBO target in October 2013, where it traded hands to Ares and the Canadian Pension Plan Investment Board (CPPIB). 

One of the crucial considerations of the Neiman restructuring was its enormous leverage, which was the result of these two LBOs. Thus, before we dive into the main focus of this article—Neiman’s infamous drop-down of MyTheresa, it is worth taking a look at the preceding LBOs. 

2005 LBO (ft. Warburg Pincus and TPG)

Following economic recovery from the dot-com bubble burst, by 2005, LBOs were back in fashion and Neiman was the star of the runway.

With many eyeing e-commerce opportunities in luxury retail, Neiman attracted the interest of several PE firms. In FY2005, the retailer was generating steadily growing revenues of ~$3.8bn, with 35% gross margin, 11% operating margin, and 6.5% net margin. Earnings totalled ~$250mm. With $2.7bn of total assets, $854mm of cash and equivalents, $457mm of long-term liabilities, and net interest expense of ~$12mm pre-LBO, Neiman’s balance sheets were relatively healthy. 

In the five fiscal years leading up to 2005, Neiman’s main segment Specialty Retail Stores (81% sales) grew at a 4.9% CAGR. From 1995-2005, the full-line Neiman Marcus and Bergdorf Goodman store count ballooned from 28 to 37 stores. By 2005, Neiman operated 35 Neiman Marcus stores, two Bergdorf Goodman stores, and 17 clearance centers. [18]

NMG had ambitious plans of future growth, with intentions to open a new Neiman Marcus store in San Antonio in September 2005, another in Boca Raton in November 2005, two more in Charlotte and Austin in 2007, another two in suburban Boston and Long Island in 2008, and another in greater Los Angeles area in 2009. Even before PE sponsors got involved, Neiman had planned a ~13% increase in square footage by 2009. Capital expenditures pre-LBO were ~$200mm. [18]

On May 2nd 2005, Warburg Pincus and TPG announced intentions to acquire the growing NMG. The sponsors would acquire all outstanding Class A and Class B shares of NMG through a reverse subsidiary merger—the sponsor-owned merger subsidiary will merge with NMG, the latter of which would be the surviving corporation—for $100 per share in cash, representing a transaction value of ~$5bn. The deal closed October 7th 2005, with each sponsor owning equal stakes upon close. [18][BBG Terminal]

The equity portion of financing consisted of $1.55bn, split equally among TPG and Warburg Pincus. Debt to capital ratio was ~70%. While the median deal comp multiples made this transaction look reasonable—median 1.82x TV/Revenue compared to NMG 1.31x; median 13.49x TV/EBIT compared to NMG 13.23x; median 9.33x TV/EBITDA compared to NMG 9.47x—it is interesting to note that deal comps included Toys R Us and Intelstat, and we know how that went…

So, how did the LBO change Neiman’s capital structure? Well, prior to LBO, NMG had a $350mm undrawn revolver, $125mm of 6.65% senior notes due 2008, and $125mm of 7.125% senior unsecured debentures due 2028. Thus, prior to LBO, Neiman had ~$250mm long-term debt. With $12.4mm interest in 2005, this amounted to an effective interest rate of ~5%. [18]

Post-LBO, NMG’s leverage increased by over 13 times (by their second LBO, it would be over 20 times their pre-LBO leverage). The 2008 notes were redeemed, and 2028 notes remained. Total existing and new debt outstanding post-LBO was ~$3.3bn, consisting of term and bridge loan facilities and 2008 senior secured. This number does not include an additional $600mm senior secured asset-based revolving facility. On a 2005 adjusted EBITDA of $528.4mm, this represents 6.25x leverage. Annual interest ballooned from $19mm to $217mm; with pre-LBO net income of only ~$250mm, Neiman was running tight. By 2006, net income had dwindled to $71mm, primarily attributable to the higher interest burden. [18][Factset]

Even as debt skyrocketed, Neiman was not using this debt to grow the business. Capex/revenue remained roughly flat at ~3%. Store count growth was also not significant. While on paper, total store number more than doubled, full-line Neiman and Bergdorf stores barely grew. During the holding period, full-line stores grew from 37 to 43. Recall that this growth was all preplanned—San Antonio, Boca Raton, Charlotte, Austin, Topanga (Boston and Long Island 2008 plans were canceled due to the Great Financial Crisis). [18][BBG Terminal]

Thus, the 2005 LBO of NMG left the company saddled with over ~$3.3bn of debt, with little growth to show for it. 

2013 SBO (ft. Ares and CPPIB)

By 2013, it had been eight years since Warburg Pincus and TPG took NMG LLC private through the entity Neiman Marcus Group LTD LLC. The sponsors were ready to exit, and NMG announced plans to IPO. 

However, these IPO plans were soon scrapped as other PE firms displayed interest in a “secondary buyout” (SBO) of Neiman. By October 2013, Ares and the Canadian Pension Plan Investment Board (CPPIB)—a professional investment management organization managing Canadian Pension Plan assets—purchased Neiman Marcus from Warburg Pincus and TPG for approximately $6bn, funded primarily through debt. Detailed deal terms were not disclosed, however, we can do some rough math to estimate returns. Free cash flows from the holding period of 2006-2013 sums to ~$1.25bn. With $3.3bn of debt, net debt at exit would be ~$2bn. If the sponsors exited at $6bn, exit equity value is ~$4bn. Given they entered at $1.55bn, MOIC is roughly 2.7x, which translates to an IRR of roughly 12%.  [1][22]

Pre-SBO, after the principal was gradually paid from 2005-2013, Neiman had $2.7bn in long-term debt, including debentures expiring in 2028. Following SBO, Neiman’s funded debt consists of a $2.8bn senior secured term loan facility maturing October 2020 (“2013 Term Loan Facility”), a $900mm senior secured asset-based revolving credit facility (“ABL Facility”), $960mm 8.000% Unsecured Senior Cash Pay Notes due 2021 (“Unsecured Cash Pay Notes”), $600mm 8.750%/9.500% Unsecured Senior PIK Toggle Notes due 2021 (“Unsecured PIK Toggle Notes”), and $125mm 7.125% Senior Debentures due 2028 (“2028 Debentures”). Together, this totals ~$5.4bn, though the facilities were not fully drawn, so total debt was really $4.7bn. On a FY2013 adjusted EBITDA of $644mm, the SBO sponsors paid a 9.3x multiple, with the new leverage sitting ~7.3x. Eyeing this heavy leverage, on October 7th 2013, debt was downgraded from B2 to B3. [26][32][BBG Terminal] 

The acquisition of NMG LTD LLC was structured through a new non-debtor parent called Neiman Marcus Group, Inc. (a.k.a. “NMG Inc.” or “NM Mariposa Holdings, Inc.”) and debtor Mariposa Intermediate Holdings LLC (“Mariposa Holdings”). The resulting organizational structure looked something like this: [26]

The ultimate parent, NMG Inc., has never been an obligor or guarantor of any of the debtors’ debt. In other words, the ultimate parent is outside the credit box. The debtors’ funded debt obligations have always been issued or guaranteed by Mariposa Holdings, NMG LTD LLC, NMG LLC, and certain guarantor subsidiaries. This fact will become crucial during the MyTheresa drop-down. [26]

Operations-wise, in the twelve months leading up to April 2014, Neiman generated $4.5bn in revenues and an adjusted EBITDA of $623mm. At the time of SBO, Neiman operated 79 stores—41 Neiman Marcus stores, two Bergdorf Goodman stores, and 36 Last Call outlet centers. Alas, things would only go downhill under Ares and CPPIB ownership.

From 2013-2017, things were really not looking too good. Topline remained largely stagnant, from $4.6bn to $4.7bn, mainly driven by a slow retail environment in 2016 and 2017. Muted U.S. economic trends, a sea change away from in-store to shopping online, reduced tourist spending due to strong U.S. dollar, and integration challenges with a new inventory management system led to weak earnings. Beginning 2017, comparable-store sales had declined for five consecutive quarters and fiscal trailing 12-month adjusted EBITDA was down 19% year-over-year. Online sales were flat for fiscal 1Q 2017, with domestic softness balanced by continued growth for the company's international online business, MyTheresa. [15]

Excluding MyTheresa, NMG EBITDA margins had historically hovered around 13-14%. By 2017, margins were 9.4%; in 2018 a mere 10.1%, while adjusted EBITDA nearly halved from 2015-2018. Debt remained roughly flat. Net interest in FY2016 was $286mm, increasing to $296mm by FY2017. In FY2017, net income was -$532mm. [15][32][33]

It’s easy to get lost in the numbers here. Compared to Hertz’s $19bn of debt, or PG&E’s $22bn of debt, $5bn of debt might seem relatively trivial. However, we need to keep in mind that this $5bn of debt is supported by a two-digit store count. Moreover, prior to SBO, net income averaged around $100-150mm; now, Neiman was shouldering upwards of $250mm+ of annual interest. 

The market recognized the precariousness of the situation. Early January 2017, Neiman Marcus's term loan was trading at ~86 cents on the dollar. Bonds were trading in the 60s. By March 15th 2017, Neiman’s credit rating was downgraded from B3 to Caa2; Neiman faced a subsequent downgrade shortly after, on October 26th 2018, from Caa2 to Caa3. [20][32]

Ares and CPPIB had had enough. 

A mere two years after their SBO, the sponsors were ready to exit. In 2015, Neiman Marcus had announced plans to IPO, but delayed to 2016 due to stock market volatility. In 2016, IPO dollar-volume was down 42% year-over-year. By 2017, as they faced weaker customer demand, Neiman withdrew their IPO plans, and pushed a revolver maturity from 2018 to 2021. [20]

The sponsors realized they were in this for the long haul, and by early 2017, Neiman retained Lazard to explore potential liability management transactions, including asset sales, debt exchanges and other strategic transactions. They first considered a sale of their U.S. operations, called Project Harry, to another luxury retailer. After that transaction terminated, the parties began negotiations early 2018 on another deal known as Project Einstein, which would have resulted in Neiman obtaining another luxury retailer’s operations in exchange for Neiman’s real estate interests. Those discussions ended in late July 2018. It was only then that the sponsors looked towards a drop-down of MyTheresa. [26]

MyTheresa

We’ve briefly mentioned it a few times prior, but now is time to properly introduce Neiman’s crown jewel: MyTheresa. 

The international e-commerce platform, mytheresa.com, traces its roots back over 30 years to a luxury boutique in Munich, Germany. In October 2014, NMG acquired the online business of MyTheresa and its physical store in Munich for $196mm (plus a later $57mm in two contingent earn-out payments) to expand its e-commerce platform and international presence. Since then, MyTheresa has operated on a standalone basis, with its own CEO, CFO and management team, as well as separate vendors, suppliers, and bank lenders. After acquisition, the German entities that operate MyTheresa sat under a series of German and Luxembourg holding entities which fell under the subsidiary, NMG International LLC. As such, MyTheresa was located well within the credit box. [4][26]

By 2018, MyTheresa had grown into a major e-commerce platform then valued at ~$282mm. It was the only growing asset in the otherwise stagnant portfolio of Neiman Marcus Group Inc.  From FY2013 to FY2019, MyTheresa’s revenue catapulted 360% from $93mm to $428mm—a 29% CAGR. From FY2014 to FY2018, MyTheresa’s revenue grew at a CAGR of 30.7%, while NMG’s revenue (excluding MyTheresa) declined at a CAGR of -0.04%. [26][32]

Drop-down: No Longer (our)Theresa

So here’s the situation: PE sponsors own a company that is now in distress. This company in turn owns a valuable asset worth $282mm (likely more) that is the only fast-growing unit in an otherwise struggling portfolio. One of the sponsors is notoriously good at financial engineering. Can you guess what happens next? 

While in hindsight it doesn’t take a genius to connect the dots, at the time, the drop-down came as a surprise. Before the 2018 transfer, there was some anticipation that NMG would use the MyTheresa shares to entice bondholders to swap their debt for bonds with a longer maturity. In other words, a distressed debt exchange involving MyTheresa shares as collateral. [12]

Ares and CPPIB had other plans. 

Before we examine what actually happened, it is worth defining what a drop-down is. It is a type of liability management exercise that entails the use of basket capacity under existing investment and restricted payment covenants to transfer assets from the entity that guarantees its debt (restricted subsidiary) to another entity that is not subject to the same creditor claims (unrestricted subsidiary). The unrestricted subsidiary, backed by the “dropped-down” collateral, is then free to issue new debt which is structurally senior to old claims on the restricted subsidiary. We can think of this as a form of asset stripping, where assets are moved outside the “credit box.” 

Of course, creditors are not clueless, and there are a litany of negative covenants to protect against asset stripping. The ingenuity of the Neiman drop-down was how the sponsors utilized a series of exceptions to outline a loophole where they could distribute a $282mm business line to themselves during a period of uncertain financial stability without triggering covenant breaches under multiple credit facilities. [1]

The Neiman drop-down occurred in two steps. First, in stages from 2014-2017, Neiman designated the MyTheresa entities as unrestricted subsidiaries under its existing debt documents. Second, Neiman distributed the unrestricted subsidiary’s equity to the NMG parent company (a.k.a. sponsors) through dividends. By utilizing loose credit documents, Ares and CPPIB were able to move the equity of MyTheresa out of the credit box and into their own hands. Let’s take a closer look. 

Step 1: Unrestricted Subsidiary Designation (2014-2017): 

Upon acquisition, MyTheresa was within the credit box, and thus were “restricted subsidiaries” subject to the affirmative and negative covenants of the credit facilities. However, they were not guarantors under the Term Loan and ABL Credit Facilities—meaning creditors did not have a lien on MyTheresa assets. This meant that Neiman would not have to worry about structuring the transaction and garnering votes to release liens, as in cases like PetSmart and Incora. [1]

But wait, if the creditors never had claim to these assets as collateral, why would they care about MyTheresa in the first place? And shouldn’t they care even less after MyTheresa is unrestricted and not even subject to covenants? Well, NMG International, the foreign subsidiary holding company wholly owned by NMG which held the MyTheresa assets, had 65% of its equity interests pledged on a first-lien basis in favor of the senior secured lenders, meaning that creditors had an indirect claim on MyTheresa equity as part of collateral. Any distributions on account of an unrestricted subsidiary’s capital stock would flow up to the loan party group, thus providing secured creditors indirect credit support through ownership in the subsidiary rather than an asset claim. Note that despite 65% pledge of NMG International’s equity interests in favor of the senior secured lenders, no MyTheresa entity’s equity was directly used to guarantee any of the Debtors’ obligations at any point. [1][26]

With that out of the way, let’s take a closer look at this drop-down. Because Step 2—where the claim on equity value is transferred directly to the parent outside of the credit box—is only possible with unrestricted subsidiaries, Step 1 was to convert these restricted subsidiaries into unrestricted subsidiaries.

Neiman’s debt instruments had several negative covenants placing parameters around unrestricted subsidiary designation, limiting investment capacity, and limiting dividends. However, these facilities had exceptions through “baskets” which quantify the maximum dollar amount for a specific exception to a covenant restriction (e.g. you can issue at most $X amount of dividends). Because Neiman had multiple credit facilities, they would have to move MyTheresa outside the credit box for each facility by utilizing basket capacity. 

Each credit facility permitted Neiman, specifically NMG LTD LLC, to designate any restricted subsidiary as an unrestricted subsidiary subject to no event of default and sufficient investment capacity. Other requirements include a minimum of $225mm in excess availability on the ABL facility, and a minimum Fixed Charge Coverage Ratio of at least 1.0x on a pro forma basis for the term loan facility. [1]

In 2014, Neiman designated the MyTheresa entities as unrestricted subsidiaries under the ABL facility and the term facility. In 2014, the MyTheresa entities were valued ~$253mm, well below the $502mm of investment capacity from Neiman’s builder investment basket, general investment basket, and foreign subsidiary investment basket. [1]

In 2017, Neiman designated the MyTheresa entities as unrestricted subsidiaries under its note indentures as well. Though the MyTheresa entities were now valued at ~$280mm, there was basket capacity to spare given the $578mm of investment capacity through Neiman’s builder basket and general investment basket. [1] [26]

So, by March 2017, Neiman had successfully designated the MyTheresa entities as unrestricted subsidiaries under all of its debt facilities, and Step 1 of the spin-off was accomplished. While MyTheresa remained in the credit box, there was now a channel out. 

STEP 2: Asset Stripping (September 2018)

For 18 months after unrestricting the MyTheresa assets, Neiman just sat on their assets. That changed in September 2018, when Neiman disclosed that the MyTheresa subsidiaries had been conveyed through a series of distributions to NMG Inc. (“Parent”), a hold-co wholly-owned by the sponsor, which, as we might recall, did not guarantee debt and thus was outside the credit box. Mariposa Luxembourg I (the highest level foreign hold-co which held MyTheresa assets) shares that had been distributed to NMG Inc. were then moved into a series of new MyTheresa holding entities: MYT Parent Co., MYT Holding Co., and MYT Intermediate Holding Co. Any value generated from MyTheresa would flow up directly to the Sponsors, bypassing lenders. [1][26]

So, what exactly were these “series of distributions”? Credit facilities usually prevent credit box “leakage” by restricting a company’s ability to make dividends and distributions. However, as in Step 1, each of the credit facilities contained an exception—an exception the sponsors were unafraid to utilize. 

An express provision (a.k.a. explicitly stated) to the limitation on restricted payments stated that Neiman was allowed to make a “distribution, as a dividend or otherwise, of shares of Capital Stock of, or Indebtedness owed to the Borrower or any Restricted Subsidiary by, one or more Unrestricted Subsidiaries.” Thus, Neiman could make a dividend of the equity of any unrestricted subsidiaries, such as the MyTheresa entities, and effectively “spin-off” that equity outside the credit box. As a result of the spin-off, the sponsor-owned parent NMG Inc. now owned 100% of the capital stock of the MyTheresa entities. Step 2 of the drop-down was complete. [1][32]

Aftermath

Neiman’s drop-down was by no means the first (e.g. 2016 J. Crew drop-down, June 2018 PetSmart drop-down); however, it was yet another precedent where borrowers exploited fairly common baskets in a credit agreement’s negative covenant which were originally intended to preserve flexibility for debtors to pay dividends. As mentioned above, these baskets serve as an exception to what may otherwise seem extremely restrictive covenants (e.g. a debtor would be much more amenable to a covenant that allows them to issue at most $X dividends compared to a covenant that does not allow dividend issuance).

When creditors realized MyTheresa was no longer their MyTheresa, they were, unsurprisingly, not happy. Because this spin-off was effectuated as a dividend rather than a sale, no fair market value consideration was required to be received, and no mandatory prepayment resulted from the transaction. That means that creditors lost part of their credit backing for zero consideration. [1] 

The market reacted poorly, with 8% cash pay notes due 2021 down 9.5pts to 64.75, and 2020 cov-lite TL trading 92, down 1.625pts. Soon after the drop-down announcement, Marble Ridge Capital, a distressed-debt investment firm based in NY founded in 2015 managing $1bn—and part of the creditor group which was stripped—filed a complaint in Dallas court. [6][12]

What ensued was a very public dispute, where Marble Ridge published letters condemning Neiman for the “sponsor’s self-enrichment scheme” and compared the restructuring plan to a “devil’s bargain.” While the name-calling was perhaps excessive, Marble Ridge made some fair points:

“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.” [13]

Neiman retaliated with a countersuit seeking damages for “false statements” intended to harm the company. [6]

Whether or not the drop-down was legal, creditors had a right to be angry. They had lent money to a company which was struggling under excessive leverage and weak demand, then watched as the same PE sponsors which levered Neiman up decided to execute a drop-down which distributed value to themselves. 

Perhaps it’s not entirely fair to say that the PE sponsors intended to preserve MyTheresa's value for themselves. On March 1st 2019, NMG attempted an out-of-court restructuring called the “Recapitalization Transaction” in an attempt to restructure debt obligations and extend maturities by three years, from 2020 to 2023 for the senior secured term loan, and from 2021 to 2024 for the unsecured (consisting of “Cash Pay” and “PIK Toggle” notes. In exchange for extending the maturity, the new notes would include a partial lien on the stock of MyTheresa and preferred equity in its parent company. Approximately 99.5% of Term Loans, 91.5% of Unsecured Notes, and the majority of 2028 Debentures—which collectively represented over $4.2bn of Neiman Marcus’ debt—participated. The transaction included a “MYT Waterfall” which specified how all amounts from any potential MyTheresa sale or IPO would be distributed among participating creditors. The Recapitalization Transaction was completed by 2019, with Marble Ridge as one of two material holdouts. [12][26][33][36]

This was not a very successful restructuring for two reasons. First, the transaction increased annual interest expense by more than $100mm (from ~$300mm to ~$400mm) while only reducing debt load by $250mm through exchange offer (from ~$5bn to ~$4.75bn). Moreover, Lazard could not actually sell off MyTheresa for the price that sponsors and creditors expected. The sale process, which began May 2019 and ended July 2019, saw the highest and best non-binding indicative offer of only $525mm (much higher than the valuation given when using baskets, but apparently still too low for sponsors). [12][26]

It was an awkward moment for Neiman and their participating creditors. To top it all off, COVID hit a year and a half later. For our brick-and-mortar luxury retailer, things were about to go down. 

Operating Under COVID

On March 11th 2020, the World Health Organization declared COVID-19 a pandemic. In response, a week later on March 18th, Neiman took the following actions: [26]

1. Voluntarily closed all stores

2. Dramatically reduced supply chain operations

3. Furloughed 80– 90% of employees

4. Cut employee salaries and wages company-wide

5. Sought concessions from brand partners and landlords 

6. Eliminated or deferred most capital expense projects

7. Limited cash disbursements and new inventory

On a macro level, retail sales plunged 20% from February to April, with 89% sales decline in clothing and accessory categories. Personal saving rates jumped from 8% to 33% between February and March as consumers cut back on spending during uncertain times. [23]

Even luxury retailers were not immune. Neiman saw an immediate reduction in cash flow of approximately 65–75%. Alas, by April 2020, Neiman still had ~5bn of debt to service. The liability management and out-of-court restructuring would not be enough to keep Neiman out of bankruptcy court. [21][26]

COVID-driven Chapter 11 (2020)

After technically defaulting on bond interest on their 2021 notes, Neiman Marcus Group LTD LLC, Bergdorf Goodman Inc. and 22 other debtors voluntarily filed a Chapter 11 prepack in the Southern District of Texas on May 7th 2020. The cases were jointly administered under the Neiman Marcus Group LTD LLC case, and together constituted one of the first high-profile retail casualties during the pandemic. [30]

Capital structure is included below: [26]

Neiman filed with total funded debt obligations of ~$5.1bn and $4bn in assets. Note how hefty the capital structure has become after PE involvement. As of the filing date, Neiman had only $126mm of cash and was not operating due to COVID lockdown. They eventually reopened 12 stores for present appointment, but were effectively still not operating. In May 2020, Neiman made ~$140mm in revenue; in June 2020, ~$180mm. Prior to COVID-19, Neiman was, by rough estimate, making on average ~$400mm in revenue (calculated by $5bn/12) a month. [26]

We can roughly approximate cash burn as: EBITDA - interest - capex - tax

• For EBITDA, the only disclosure for COVID operations is from Docket 1264 which shows -$60mm EBITDA in May 2020 and -$35mm EBITDA in June 2020. Thus, Average monthly EBITDA during COVID is approximately -$48mm. [27]

• For interest, the latest disclosure was $245mm 39 weeks up to Q3 2019. Normalizing to month, we get ~$27mm in monthly interest. [21]

• For capex, the latest disclosure was  $132mm 39 weeks up to Q3 2019. Normalizing to month, we get ~$15mm in monthly capex. [21]

• Taxes are negligible, as they were a small credit of $12mm 39 weeks up to Q3 2019 [21]

The resulting calculation: -48 - 27 - 15 = -$90mm per month. With fees, burning through $126mm cash in one or two months was nearly inevitable.

Knowing this, the prepack plan, fortunately, included commitments from over 77% of Extended Term Loans, over 99% of 2L Notes, and over 69% of 3L Notes to equitize their debt and backstop $675mm in new DIP financing (junior priority to existing ABL) and $750mm in committed exit financing facility. [25]

However, even with widespread support for the prepack, fraudulent transfer claims can still be pursued. Those participating in the 2019 debt exchange had agreed to release the parent and SBO sponsors from fraudulent transfer claims, so opposition came mostly from unsecured creditor holdouts who preserved their claims against the SBO sponsors. This included Marble Ridge Capital, who is about to become a major player. [11]

Courtroom Drama Part 1: Fraudulent Transfer

Given the MyTheresa drop-down, there were plenty of grounds for potential litigation. Creditors could argue an actual or constructive fraudulent transfer, a breach of the financing agreement, or a violation of the implied covenant of good faith and fair dealing. The main argument they pursued was fraudulent transfer. 

Fraudulent transfer, or fraudulent conveyance, is an effort to avoid debt by transferring assets to another person or company. While under normal circumstances one is free to transfer his assets, the transaction is considered fraudulent if the following is satisfied: 

Statutes of limitations for fraudulent transfer claims under state law are typically 4-6 years (meaning fraudulent transfer claims can be pursued for up to 4-6 years after it happened), though it depends on the jurisdiction. As indicated in the chart above, there are two types of fraudulent transfer: actual and constructive. While intent matters for actual fraudulent transfer, it is irrelevant in constructive fraudulent transfer, which is concerned only with financial facts. The unsecured creditors’ committee (UCC) argued both against Neiman. It was probably overkill, as repercussions for both are the same: If determined a fraudulent transfer, the transaction can be unwound and property can be recovered and sold by the trustee for the benefit of the creditors. [31]

On July 24th, the UCC filed its preliminary report (Docket #1346) and an expert report from the Michel-Shaked Group (Docket #1354) delineating how Neiman was insolvent at the time of transfer. The Michel-Shaked Group concluded that MyTheresa had an equity value of $675mm in March 2017, while debtors, even including MyTheresa, had an equity value of -$1.198bn. Notably, even Lazard had stated a negative equity value for the Debtors (excluding MyTheresa) as of early 2017. The report further critiqued a 2018 solvency opinion by Adam Orvos (NMG CFO from April 2018 to October 2019) which opined that NMG’s assets had a fair value of over $7bn which exceeded the $6.7bn of liabilities resulting in an equity surplus and thus meant that debtors were solvent. Michel-Shaked Group noted that the valuation was reliant on overly optimistic management projections, did not independently evaluate the fair value of assets, and used a flawed peer group. [32]

This was not the first time Neiman had been accused of fraudulent transfer. Remember Marble Ridge Capital? Their earlier challenge was dismissed by a Texas court because of procedural issues with its lawsuit, and no decision on the fraudulent transfer allegations was reached. [11]

Courtroom Drama Part 2: Criminal Bid-Rigging

The first Plan of Reorganization (POR) outline was filed without MyTheresa equity distributions to unsecured creditors as part of recovery.  

On July 9th 2020, the UCC threatened to terminate the exclusivity period and filed a competing plan outline that preserves viable claims relating to MyTheresa. Proposed plan also included releases that would shield SBO sponsors from future litigation, so a contentious confirmation process would be risky for sponsors to pursue. Moreover, because the UCC analysed MyTheresa transfers, Neiman would have to present the results of its own investigation into the transfer. [11]

On July 30th, the parties announced a global settlement where unsecured creditors agreed to drop objections to Neiman’s reorganization and claims against main equity sponsors in exchange for a 140mm share stake in MyTheresa. General unsecured claimants now received new recoveries including MyTheresa Series B preferred stock, which they would hold for a few years until MyTheresa IPO-ed. However, these general unsecured creditors include a variety of vendors and suppliers who, in light of COVID, needed liquidity first and foremost. [6]

To make the deal work, the UCC began negotiating with Dan Kamensky, co-founder of Marble Ridge Capital and co-chairman of the UCC, on a proposal for Marble Ridge to buy the securities from unsecured creditors who wanted to sell. Marble Ridge would guarantee, or “backstop,” the purchase of 60mm Series B Shares at 20 cents per share from other unsecured creditors wishing to sell. 

Shortly after the settlement became public, two clients of Jefferies contacted Jefferies about purchasing, in total, up to 80mm of the Series B shares. Jefferies indicated it would be willing to bid more, at 30-40 cents per share, and submitted a bid on July 31st 2020.

Upon learning of Jefferies’ bid, Kamensky’s own bid on behalf of Marble Ridge was in jeopardy. That same afternoon, Kamensky sent messages to a senior trader and a senior analyst at Jefferies, threatening to use his position on the creditors committee to block the offer if it wasn’t withdrawn. Kamensky added that if Jefferies went ahead with the bid, Marble Ridge would not do business with them, noting it would be a “relationship issue.” As co-chair for the committee of unsecured creditors, who were demanding a piece of MyTheresa to compensate for losses, Kamensky had a duty to get the highest return for everyone. Instead, he took advantage of his position to benefit Marble Ridge at the expense of other unsecured creditors. [6][10]

Jefferies’s head of distressed-debt investing Joe Femenia responded, “I’m fine [standing down], but I’m disclosing why I’m not bidding.” He then informed the legal advisor to the UCC of Jefferies’ decision resulting from Kamensky’s influence. Advisors to the Committee informed counsel for Marble Ridge, who, after speaking with Kamensky, falsely alleged that Kamensky had told Jefferies to place a bid only if “they were serious,” denying that Kamensky expressly threatened Jefferies into withdrawing their bid–which is what actually happened.

When Kamensky heard of this, he panicked. Later that evening, Kamensky called Femenia in an attempt to cover up his transgression. Femenia recorded the call, where Kamensky urged him to state he had been mistaken on Kamensky’s threats, and to treat this conversation as off the books. [10]

In that call, Kamensky admitted he was at risk of going to jail, stating:

“Like, bid all you want but don’t – don’t – don’t put me in jail…”

“[I]f you’re going to continue to tell them what you just told me, I’m going to jail, OK?...Because they’re going to say that I abused my position as a fiduciary, which I probably did, right? Maybe I should go to jail. Bit I’m asking you not to put me in jail”

Despite Kamensky’s backtracking, Femenia replied,“... Dan [] I would never lie for anyone, okay, like 100 percent clear because that in and of itself is a crime and I have ethics.” Kamensky’s lack of ethics was left unsaid. [10]

When this call was brought to court, the fall-out was so severe that Marble Ridge’s lawyer, Weisfelner from Brown Rudnick withdrew earlier falsified declarations of Kamensky’s story, and sought outside advice on what actions would “honor his professional obligations” to the court process “without violating his continuing obligations to Marble Ridge.” You know you’re done for when your lawyer needs a lawyer. [8]

Kamensky was arrested by federal authorities and sued by the SEC. On September 3rd 2020, the day before plan confirmation, Kamensky was charged with securities fraud, extortion, and obstruction. This was especially ironic given how Marble Ridge had earlier attacked independent director Beilinson for being self-serving. Judge Jones did not hesitate to rip into Kamensky, saying: [6] 

“The Court believes you to be a thief, a person of the lowest character that attempted to steal, not based on need, not based on necessity, but out of pure greed. To make it worse, you attempted to steal from people that you had taken an oath to act as a fiduciary for. You then lied about it and you attempted to induce others to break the law to cover your transgressions.”

…we have nothing more to add. 

Kamensky pled guilty to one count of fraud, and was to serve 6 months in prison—a win given the Department of Justice had been pushing for 12-18 months. As part of the settlement, Kamensky was to contribute $100k to various charities, attend 15.5 hours of Continuing Legal Education relating to bankruptcy and ethics, and perform over 200 hours of community service, including 39 hours dedicated to appearing before business and law students to discuss, among other things, his ethical lapses.

As for Marble Ridge, the firm resigned from the Committee and began winding down operations. They not only had claims subordinated below general unsecured creditor claims, but would also pay $1.4mm to Neiman Marcus to make up for legal costs associated with Kamensky’s breach of fiduciary duty. After years of litigation and millions in legal expenses, Marble Ridge would be forced to pay their “nemesis.” It was a bitter end, as Marble Ridge’s original allegations on fraudulent transfer were right. They would have been lauded as heroes if it weren’t for Kamensky’s desperate—and criminal—grab. [14]

Note that this criminal case is separate and Kamensky’s arrest did not impact the final Plan of Reorganization.

So, What’s the Plan?

The final plan was not much different from the prepack, except for the MyTheresa distribution. The Asset-Based Revolving Credit Facility (Class 3) and FILO Facility (Class 4) received par in cash. The term loans (Class 5 & 6) received most of the equity and exit rights, pro rata (87.5%), subject to dilution. The rest would receive slivers of reorganized equity. Class 8 received seven-year warrants to purchase up to 25% of the reorganized equity and 2L MyTheresa Distribution (became 2L creditors); Class 9 also received 3L MyTheresa Distribution (became 3L creditors). General unsecured creditors (Class 10 & 11) also got stakes in MyTheresa, receiving a pro-rata share of a cash pool consisting of MYT Series B Preferred Stock and $10,000,000 cash. The private equity sponsors were wiped out. [26]

Creditors including Davidson Kempner, Sixth Street, PIMCO effectively forgave $4bn of debt and $200mm in interest in exchange for control. Ares and CPPIB were now out of the picture, and a new Board was instated, with the same CEO, three PIMCO directors, one Davidson Kempner director, one Sixth Street director, and one independent director. [5][26]

The $750mm exit financing package was to refinance DIP and provide liquidity, in addition to $900mm ABL led by Bank of America. 

The plan was confirmed September 4th 2020 and Neiman reemerged on September 30th 2024 with less debt (~$1bn debt, implying ~$120mm interest), new owners, and more liquidity—a mere four months after filing. As Neiman remained a private company, specifics were undisclosed. 

What’s Next?

On January 21st 2021, MyTheresa IPO-ed under the MYTE ticker on the New York Stock Exchange with a $2.2bn valuation. This IPO offering far exceeded Kamensky’s earlier expectations of $1bn, and even more than the sponsors’ valuation of $282mm (based on how no 2019 offers exceeded $500mm).   The IPO raisedwas valued at $407mm. For FY2020, MyTheresa had a net income of 6.35mm euros on revenues of 450mm euros. The company targeted top-line growth of 22-25% and an EBITDA margin of 8%. They fell short, with 2020-2024 topline CAGR of ~15% and EBITDA margin falling to under 1%. As of December 2024, MYTE stock was down ~80% since IPO. [4][37]

As for Neiman, during the bankruptcy they closed in total 22 stores during Chapter 11, including 17 Last Call stores. Sales jumped from the end of 2020 through 2022 as consumers splurged their savings. However, with rising inflation and partners beginning to sell directly from their websites instead of department stores, Neiman’s quarterly sales again began to fall. 

Neiman’s new creditor-turned-owners such as PIMCO seek a relatively quick return, and were not looking for a years-long operational turnaround. Neiman would again exchange hands. [9][34]

On July 4th 2024, Saks Fifth Avenue parent company Hudson’s Bay Co. (HBC) agreed to buy Neiman Marcus Group for $2.65bn. The move would unite America’s two largest high-end department-store chains in a bid to grab a bigger share of the slowing department store industry and gain bargaining power with vendors. While Saks is more dominant on the East Coast, Neiman has a larger presence in the southern and western regions of the U.S. The acquisition combines 39 Saks 5th Avenue stores, 36 Neiman locations, and 2 Bergdorf Goodman stores for a total store count of 77 and a U.S. real estate portfolio worth $7bn. Upon deal close, HBC will establish Saks Global, a combination of luxury and real estate assets including Saks Fifth Avenue, Saks OFF 5th, Neiman Marcus, and Bergdorf Goodman. [3][9]

The deal is to be funded with equity capital from new and existing shareholders including Amazon, Rhone Capital, Insight Partners, and Salesforce. The equity funding is to be joined by debt facilities including a $1.15bn TL from Apollo, and $2bn revolving ABL facility from BoFA, Citigroup, MS, RBC Capital Markets, and Wells Fargo. [3]

The move is part of a larger trend of industry consolidation in response to consumer shifts away from department stores. Nordstrom is considering being taken private, and the new CEO at Macy’s is shutting down ⅓ namestake stores. The decline in retail store share prices, and investors eyeing real estate, may lead to further acquisitions down the line. The Neiman deal is expected to attract antitrust scrutiny, and is yet another step in the luxury retailer’s long history. [9]

Conclusion

Neiman was notable as one of the first high-profile COVID retail bankruptcies. The case has several long-term implications. First, it calls into question the effectiveness of out-of-court restructurings and liability management transactions such as drop-downs. Despite all the financial engineering, Neiman still ended up in bankruptcy court, and with an even more complicated capital structure and more litigation to sort through. The litigation associated with liability management transactions such as the fraudulent transfer claims against Neiman would eventually drive a shift in liability management 1.0 (drop-downs, up-tiers, etc.) towards liability management 2.0 (cooperation agreements, etc.) 

Second, Neiman’s elimination of $4bn of debt in court highlights how deep retail restructurings are possible through Chapter 11. 

Third, Neiman was a dramatic example of how there is absolutely no room for shenanigans in bankruptcy, as we saw in the case of Kamensky’s criminal bid-rigging. Fiduciary duties are not to be taken lightly. 

Finally, Neiman’s drop-down, nicknamed the “Neiman Exception,” led more to consider tightening credit documents. For example, one could consider an express restriction on a sponsor’s ability to dividend or spin out an unrestricted subsidiary to itself, or to limit the designation of unrestricted subsidiaries to subsidiaries being newly formed or acquired. While we have not seen credit documents tighten significantly as of 2024, Neiman’s legacy sets the stage for future revision. [2]

If you made it to here, I want to say a big thank you. I estimate only a small percentage of you read these long and detailed pieces so if you enjoyed this, a reply would mean the world to me!

[1, 2; Pari Passu Research], [3], [4], [5], [6], [7], [8], [9], [10], [11: BBG Terminal], [12], [13], [14], [15], [16], [17], [18], [19], [20], [21], [22], [23], [24], [25], [26], [27], [28], [29], [30], [31], [32], [33], [34], [35], [36], [37]

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