Fri 03/19/2021 10:20 AM
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2026 Senior Secured Notes Core Analysis

Neiman Marcus (“Neiman”), which emerged from chapter 11 bankruptcy in September 2020, is issuing $1 billion of senior secured notes due 2026 (the “New Notes”), with the proceeds to be used to refinance most of its exit debt, consisting of term loans, a FILO facility, and floating rate notes. Continue reading for our Americas Covenants team's analysis of the Neiman Marcus new secured notes and Request a Trial for access to the linked debt documents, tear sheets, and summaries as well as our coverage of thousands of other stressed/distressed debt situations.

The New Notes are expected to price today.

According to the offering memorandum, the company is also seeking an amendment to its ABL facility “to, among other things, loosen certain of the provisions that may restrict availability of borrowings under the ABL Facility, including the excess availability blocker.”

Neiman’s debt structure as of Jan. 30, 2021, and adjusted for the New Notes issuance and a subsequent paydown on the ABL, is set forth below for reference:
Neiman Marcus Capitalization

A comprehensive report on the New Notes is available HERE.
Notable Issues

Items of interest under the New Notes include:

  • Flexibilities: The New Notes provide approximately $1.23 billion of capacity for additional pari secured debt; at issuance, the company cannot access a leverage-based debt basket permitting additional pari secured debt when in compliance with a 4x net first lien leverage ratio. At issuance, the company has $1.075 billion of debt, all secured, and negative LTM Adjusted EBITDA.The New Notes otherwise provide limited flexibility at issuance, allowing only $250 million of general-purpose structurally senior debt (with a cap on ratio debt incurred by nonguarantor restricted subsidiaries), though $100 million of this amount could alternatively be used to incur additional pari secured debt. The New Notes allow $250 million of value to be transferred to unrestricted subsidiaries, $75 million of which could alternatively be used to pay dividends. Leverage-based investments and restricted payments baskets, each subject to a 4x net total leverage test, are not accessible at issuance.

  • Grower basket sizing: Grower baskets under the New Notes are generally sized so that the EBITDA-based prong will exceed the fixed-amount prong once LTM EBITDA exceeds approximately $150 million. The company’s reported LTM adjusted EBITDA for the fiscal year ended Aug. 3, 2019, was $436.3 million.

  • RP builder basket: The builder basket component based on consolidated net income is deemed to be zero if net income for the calculation period is a deficit. Usually this basket requires a 100% of any deficit to be subtracted from builder capacity.Typically, access to the builder basket requires that the issuer have the ability to incur additional ratio debt under the applicable test (usually a 2x FCCR test). Under the New Notes, this condition does not apply if builder capacity is used for restricted investments, and for other restricted payments, applies only to use of the CNI-based component.

  • Refinancing: Refinancing Indebtedness is not required to be incurred concurrently with the repayment or termination of the debt being refinanced, but rather “may be incurred from time to time” after the repayment of other debt.Liens securing Refinancing Indebtedness are not required to have the same priority as the liens securing the refinanced debt, meaning that junior lien debt could be refinanced with pari secured debt.

  • Uncapped cost-savings addback to EBITDA: The New Notes allow an uncapped adjustment to EBITDA for “run rate” cost savings, operating expense reductions, or other operating improvements, if such savings are projected to be realizable within 24 months of any calculation date. In other deals, this addback is often capped at 25% of EBITDA.

  • UnSub actions not attributed to restricted group: The New Notes expressly provide that actions by unrestricted subsidiaries using value transferred in a Permitted Investment will not be deemed a “direct or indirect” action by the restricted group, making clear that the negative covenants will not apply to such actions.

  • 10% at 103 redemption: The New Notes permit redemption of up to 10% of outstanding Notes at 103% during each 12-month period after issuance, until 2023.

  • Release of guarantees: Guarantees can be released with majority noteholder consent. Often, consent of all affected noteholders is required to release guarantees.

  • Timeline for reinvestment of asset sale proceeds: Asset sale proceeds must be applied within 365 days of receipt, but this requirement is satisfied by a binding commitment to reinvest such proceeds, if entered into with a “good faith expectation” of application within 90 days. However, there is no requirement that funds actually be applied within any fixed time period.

  • UnSub designation after default: While designation of an unrestricted subsidiary is not permitted if it would “cause a Default,” such designation is not prohibited after a default or event of default has occurred.

Flexibility Under the New Notes

As summarized in the flexibility scale below, the New Notes provide Neiman with limited flexibility, especially with respect to structurally senior debt, transfers to unrestricted subsidiaries, and dividends. As noted above, all leverage-based amounts are inaccessible at issuance:

--Mitch Oates
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