Neiman Marcus Emerging From Bankruptcy

Neiman Marcus Group is planning to emerge from bankruptcy September 30th. Their restructuring plan was confirmed by Judge David R. Jones on September 4th. Neiman Marcus has been owned by Ares Management and the Canada Pension Plan Investment Board but they will be losing their ownership in the restructuring. The creditors will become the equity holders.

The plan is pretty complicated. There are 14 different classes of claims and the equity is being split among five of them. There is only one bond issue trading in the public market:

• 7.125% Senior Debentures due 6/1/28
• Price: 2.00
• Outstanding: $125 million
• Treatment:1.7% of equity (2.8% diluted down to about 1.7%) + 2.8% participation rights in the Exit Loan Facility

The official Disclosure Statement of the plan (Exhibit D: Valuation Analysis) puts the total equity in the reorganized Neiman Marcus at $1.015 billion. A naive valuation of the bonds using the 1.7% equity would give a fair price of 13.80. But will it reach that valuation?

Exhibit C, Financial Projections, projects that 2022 EBITDA will be $315 million. If we assume EV/EBITDA of 2.7 (Macy's is currently 2.7 and Nordstrom 2.8) then it will have an Enterprise Value of $850 million. With $1.3 billion in debt, the new company will have no EV left for the shareholders. Unless the participate in the Exit Loan Facility.

If we purchase the 7.125% Senior Debentures we will receive our share of 2.8% of the equity and 2.8% of the rights to participate in the Exit Loan Facility. The Exit Loan Facility will be a term loan (or maybe notes with comparable terms) of $750 million paying interest of LIBOR + 11% (with a minimum 1% for LIBOR) for a period of 5 years - with a signup bonus of our share of 30% of the equity in the company. In addition to interest payments there are principal payments along the way of 1% per year. It is a very sweet deal for the lender. We get to loan them money at 12% interest for five years plus an additional allocation of the stock.

What would be our share of the Exit Loan Facility? It would be 16.8 cents for every dollar of face value we own. (That's 2.8% of $750 pro rated across the $125 face value of the 7.125% Senior Debentures.) So if we were to purchase ten of these $1000 bonds ($10,000 face value) on the market today it would cost us $200. In return we would get:

1. Stock with an aggregate book value of $1,380.
2. The right to loan $1,000 to the company for five years on very favorable terms. (Rights for an additional $680 would be unusable.)
3. Additional stock with an aggregate book value of $406. ($274 not received because of the unusable rights.)

Some of the rights would be unusable to us because the Exit Loan Facility will most likely be issued as special notes in $1000 denominations - with no provision for fractional notes.

If the event of a subsequent bankruptcy, our stock would be worthless but our notes from the Exit Loan Facility would have senior claim and therefore excellent treatment in any new restructuring or liquidation.

One final note: As is usual, the firms that got in early and helped hammer out this deal get special treatment. They get to designate directors of the new company and to "backstop" the issuance of the Exit Loan Facility and get paid a 10% fee, payable in stock. The biggest player in this deal was PIMCO. The plan grants PIMCO the right to designate three board members for the new company.