Relevant Item:
Neiman Marcus Debt Documents

As illustrated in the table below, Neiman Marcus has approximately $4.9 billion of debt, all of which currently trades at a discount to par. The Revolver likely provides a substantial portion of the company’s current liquidity and due to its springing maturity would be the nearest term maturity in the company’s capital structure. If the company is unable to either repay the Term Loan when it comes due on Oct. 25, 2020, or extend the maturity date of the Term Loan past Oct. 25, 2021, the Revolver springs to a July 2020 maturity.
 

We previously analyzed the company’s secured debt capacity, restricted payments capacity and its ability to sell assets under its debt documents. In this piece, we analyze the company’s ability under its debt documents to make Investments. As we have discussed in detail, retailers J.Crew and Claire’s recently relied on their Investments capacity to transfer assets to an unrestricted subsidiary. Unrestricted subsidiaries are generally not obligated to comply with certain restrictive covenants and can therefore potentially provide a company with additional flexibility to address its outstanding debt. However, Investments in unrestricted subsidiaries can also result in value leakage for current debtholders. Even Investments in restricted subsidiaries can potentially reduce the value of debtholders’ claims to the extent such Investments are made in non-Guarantors. As discussed in more detail below, Neiman Marcus’ debt documents permit a substantial amount of Investments in both unrestricted subsidiaries and in restricted subsidiaries that are non-Guarantors.   

Covenant Conclusions
 
  • With respect to the company’s capacity to make Investments in Unrestricted Subsidiaries, either the Term Loan or the 2021 Notes are likely the limiting factor depending on the value of the “Available Amount” under the Term Loan. The 2021 Notes may permit up to $250 million of Investments in Unrestricted Subsidiaries, while the Term Loan may permit up to $150 million plus the Available Amount of such Investments.
     
  • While the remaining value of the Available Amount under the Term Loan is not clear from public information, it is defined as $200 million plus certain percentages of excess cash flow since October 2013 and proceeds from certain transactions. Notably, it is not reduced for losses of cash flow or net income.
     
  • With respect to Investments in Restricted Subsidiaries that are not Guarantors, the Term Loan is likely the limiting factor. Under the Term Loan, in addition to the capacity noted above ($150 million plus the Available Amount), which it could use without restriction, the company could make up to $50 million of Investments in Restricted Subsidiaries that are not Guarantors and $100 million of Investments in Foreign Subsidiaries.

Debt Structure

We discussed Neiman’s debt structure in detail previously, and Reorg recently published a tear sheet on the company. Illustrated below is a simplified version of the company’s organizational structure.
 

To summarize, the company’s outstanding debt includes the following:
 
  • an Asset-Based Revolving Credit Facility (the “Revolver”);
     
  • a Senior Secured Term Loan Facility (the “Term Loan”);
     
  • $125 million of 7.125% Senior Debentures due 2028 (the “2028 Notes”);
     
  • $960 million aggregate principal amount of 8% Senior Cash Pay Notes due 2021 (the “2021 Cash Pay Notes”); and
     
  • $600 million aggregate principal amount of 8.75%/9.5% Senior PIK Toggle Notes due 2021 (the “2021 PIK Notes,” and together with the 2021 Cash Pay Notes, the “2021 Notes”).

According to the company’s most recent 10-K, the Revolver, the Term Loan and the 2021 Notes are guaranteed by certain of the company’s subsidiaries, subject to certain exceptions, including ones for foreign subsidiaries and any holding company of the foreign subsidiaries. Meanwhile, the 2028 Notes, although being in certain respects structurally senior to the bank debt and the 2021 Notes, do not seem to be guaranteed by at least certain of the domestic subsidiaries, according to the company’s latest 10-K. The bank debt is secured “subject to certain significant exceptions, by substantially all of the assets of” the company and the subsidiary guarantors. The 2028 Notes are secured by “certain collateral subject to liens granted” to the bank debtholders.  

Investments Capacity Under the Debt Documents

With the exception of the indenture for the 2028 Notes - which do not include covenants limiting Investments - each of the company’s debt documents includes a covenant that restricts Neiman Marcus Group LTD LLC and its restricted subsidiaries from making any Investments. “Investments” are generally defined under the Term Loan Credit Agreement to include purchases of equity interests or other securities of another person or any loans or advances made to another person or “investments” made in another person, including in Unrestricted Subsidiaries. Notable exceptions under the Investments covenants are summarized in the following chart. Despite being issued under separate indentures, the 2021 Notes include substantially similar Investments covenants and are accordingly grouped together.
 

“Consolidated Total Assets” is defined under the company’s debt documents as total assets of the company and its restricted subsidiaries as reflected on the company’s most recent month-end financial statements. As illustrated below, on the basis of the company’s latest 10-Q, the company’s Consolidated Total Assets values do not currently yield Investments capacity that exceeds the fixed dollar amounts summarized in the chart above.
 

Term Loan

Under the Term Loan, the company could have Investments capacity of up to $150 million plus the Available Amount that it could use without restriction (that is, without any requirement that it invest in a Restricted Subsidiary or a Foreign Subsidiary). While the remaining value of the Available Amount under the Term Loan is not clear from public information, it is defined as $200 million plus certain percentages of excess cash flow since October 2013 and proceeds from certain transactions. Notably, it is not reduced for losses of cash flow or net income.  

Additionally, under the Term Loan, the company could make up to $50 million of Investments in Restricted Subsidiaries that are not Guarantors and up to $100 million of Investments in Foreign Subsidiaries.

Under the Term Loan, the $150 million general basket and the $100 million basket for Foreign Subsidiaries require that Investments be valued “at their original Fair Market Value and without taking into account subsequent increases or decreases in value.” This requirement could be relevant given that the company’s latest 10-Q states that the company has recorded about $466 million of impairment charges in order to state certain of the company’s intangible and long-lived assets to their estimated fair value.   

Revolver

Under the ABL Credit Agreement, most notably, the company could make any Investments as long as the Payment Conditions are satisfied. The Payment Conditions require (1) that availability under the Revolver exceeds the greater of (a) 15% of the Line Cap (the lesser of the revolving commitments and the borrowing base) and (b) $90 million and also that (2) the Fixed Charge Coverage Ratio is at least 1x (although this second requirement is not necessary if availability under the Revolver exceeds the greater of 25% of the Line Cap and $200 million). As illustrated below, we estimate that the Payment Conditions were satisfied as of Oct. 29. Assuming the Payment Conditions continue to be satisfied, the company is not limited in its ability to make Investments under the ABL Credit Agreement.
 

2021 Notes

Meanwhile, under the 2021 Notes, as illustrated below, we estimate that the company likely could not satisfy the 3.5x Total Net Leverage Ratio or the 2x Fixed Charge Coverage Ratio in order to access the relevant baskets summarized above. Note, however, that we have used reported adjusted EBITDA as a proxy for EBITDA as calculated under the indenture and that the company may have access to add-backs that could allow it to satisfy the ratios. Nevertheless, note that the ratios would be calculated pro forma the Investment, meaning that any reduction in EBITDA resulting from the Investment would affect the company’s ratio.
 
 

Assuming the company could not access the baskets conditioned on satisfaction of  these ratios, under the 2021 Notes the company could have up to $250 million of Investments capacity that it could use without restriction (that is, without any requirement that it invest in a Restricted Subsidiary, etc.). Additionally, the company could make unlimited Investments in Restricted Subsidiaries (some of which could be non-Guarantors), plus Investments of up to $100 million in any “Similar Business” (but notably, this Similar Business basket could not be used for Investments in Unrestricted Subsidiaries). “Similar Business” is broadly defined as any business that is similar, incidental to or related to Neiman Marcus’s business.

Similar to certain of the Investments baskets discussed above under the Term Loan, the $150 general basket summarized above under the 2021 Notes requires that Investments be valued at  “at their original Fair Market Value and without taking into account subsequent increases or decreases in value.”

Overall Investments Capacity

With respect to the company’s capacity to make Investments in Unrestricted Subsidiaries, either the Term Loan or the 2021 Notes are likely the limiting factor depending on the Available Amount remaining under the Term Loan. The 2021 Notes may permit up to $250 million of Investments in Unrestricted Subsidiaries, while the Term Loan may permit Investments in Unrestricted Subsidiaries of up to $150 million plus the Available Amount.

With respect to Investments in Restricted Subsidiaries that are not Guarantors, the Term Loan is likely the limiting factor since the 2021 Notes do not limit Investments in Restricted Subsidiaries, including Investments in non-Guarantors. Under the Term Loan, the company could have up to $150 million of Investments capacity plus the Available Amount that it could use without restriction. Additionally, under the Term Loan the company could make up to $50 million of Investments in Restricted Subsidiaries that are not Guarantors and $100 million of Investments in Foreign Subsidiaries.

Finally, as summarized in the chart above, all of the company’s debt documents permit Investments in a “Receivables Subsidiary ... in connection with a Qualified Receivables Financing.” Among other things, the definition of “Qualified Receivables Financing” requires that the company receive fair market value in connection with such a financing.  

Conclusion

We examined Neiman Marcus’ capacity under its debt documents to make Investments, which could be a source of value leakage for current debtholders. With respect to the company’s capacity to make Investments in Unrestricted Subsidiaries, either the Term Loan or the 2021 Notes are likely the limiting factor depending on the value of the “Available Amount” under the Term Loan. The 2021 Notes may permit up to $250 million of Investments in Unrestricted Subsidiaries, while the Term Loan may permit up to $150 million plus the Available Amount of such Investments. While the remaining value of the Available Amount under the Term Loan is not clear from public information, it is defined as $200 million plus certain percentages of excess cash flow since October 2013 and proceeds from certain transactions. Notably, it is not reduced for losses of cash flow or net income.

With respect to Investments in Restricted Subsidiaries that are not Guarantors, the Term Loan is likely the limiting factor. Under the Term Loan, in addition to the capacity noted above ($150 million plus the Available Amount), which it could use without restriction, the company could make up to $50 million of Investments in Restricted Subsidiaries that are not Guarantors and $100 million of Investments in Foreign Subsidiaries.