Neiman Marcus
Plan Waterfall Model: Neiman Marcus Plan Economics Significantly Affected by Equity-Based Fees for Financing Parties; Midpoint Estimated TL Recovery of 24.5% Could Be Increased Through Exit Facility Participation
Wed 06/10/2020 07:00 AM
Relevant Items:
First Day Declaration
RSA
Restructuring Term Sheet
DIP Financing Motion
DIP Credit Agreement
Exit Facility Term Sheet
Plan
Disclosure Statement
Link to Excel Model
Neiman Marcus entered chapter 11 protection on May 7 with a restructuring support agreement supported by a significant majority of the company’s secured creditors. The following analysis details the terms of that RSA and estimates recoveries under the proposed plan for the various creditors in Neiman’s complex capital structure.
As will be discussed in more detail, while the RSA has broad support from secured creditor constituencies, a number of factors complicates any analysis of recoveries. These factors include uncertainty regarding the debtors’ plan equity value estimate, the need to include the possibility of recoveries from MyTheresa for second lien and third lien noteholders, and the significant dilutive impact of fees paid to DIP and exit facility backstop and commitment parties in post-reorganization equity. Our summary estimated recoveries under Neiman’s proposed plan construct are shown below.
The company’s prepetition capital structure, including MyTheresa, is shown below:
RSA Overview
Under the debtors’ RSA, headline distributions of post-reorganization equity to prepetition secured creditors, before any dilution, are as follows:
The debtors’ ABL and first-in, last-out, or FILO, loans would receive value equal to the allowed amount of such claim, “provided that such value shall not exceed the value of such holder’s interest in the estate’s interest in the property securing such Claims.” Treatment of general unsecured creditor claims is not specified under the RSA. Second lien noteholders would receive warrants for 25% of reorganized Neiman, struck at an equity value of $2.025 billion under the plan. These warrants are assumed to be out of the money and therefore are not included in the above image or accounted for directly as a source of dilution in the following analysis.
The RSA provides for a $675 million DIP facility - backstopped by the parties shown in the image below - and contemplates a $750 million exit facility backstopped by the same group.
The equity splits detailed above are significantly affected by the dilution proposed under the RSA. Specifically, the RSA contemplates:
Based on our estimate of plan equity value, as discussed in more detail below, the equity splits for prepetition secured creditors after adjusting for these sources of dilution are as follows:
Note that the above image reflects equity splits based on each secured creditors’ claim - that is, their allocation of post-reorganization equity prior to a decision to participate in the DIP financing and exit financing. Participation in the exit financing in particular will yield a significant increase in the allocation of equity to a given secured creditor, driven largely by a participation fee of 30% of the post-reorganization equity in Neiman. The 5% of post-reorganization equity allocated to a management incentive plan in the above image is an estimate as the debtors have not disclosed their proposed MIP at this point.
Neiman Valuation and Estimate of Chapter 11 Cash Flows
Relying on the debtors’ DIP budget and making the simplifying assumption that the budget, which runs through August 1, is a reasonable approximation of the debtors’ cash flows while in chapter 11 through their targeted emergence date in “early Fall 2020,” we estimate the following summary cash sources and uses:
Based on these sources and uses, we estimate the debtors would emerge with about $1.095 billion in net debt, consisting of the $750 million exit facility term loan, $370.4 million drawn under an ABL facility and $25 million in balance sheet cash. Relying on the debtors’ “Long Range Plan” projections, which estimate 2022 adjusted EBITDA of $361 million and unlevered free cash flow of $149 million (increasing to $426 million and $269 million, respectively, in 2023) we estimate an EV for Neiman of $2.166 billion at the midpoint, based on a 6x EV/EBITDA multiple.
The long range plan projections, a copy of which was reviewed by Reorg, are recreated below. Note that for valuation purposes, Reorg uses Neiman’s 2022 EBITDA estimate. According to the company’s estimate, adjusted EBITDA recovers from a low of $48 million in 2020 to $101 million in 2021 before reaching $361 million in 2022. According to the company’s estimates, 2023 adjusted EBITDA is expected to reach $426 million.
Based on this valuation of Neiman’s post-reorganization equity, we estimate the following recoveries for secured creditors under the debtors’ proposed plan construct. Note that these estimates exclude recoveries from MyTheresa as well as any recoveries on account of the rights to participate in the exit facility and the option to participate in the DIP facility made available to secured creditors under the plan.
Neiman Collateral Waterfall
One interesting aspect of the proposed plan is the appearance, based on the above estimates, that third lien noteholders are receiving a higher recovery than second lien noteholders (before including MyTheresa and dependent on a valuation of the second lien warrants). As reflected below the Neiman third lien notes have a first lien on certain real estate. The recovery available to third lien noteholders from this collateral is capped at $200 million.
This first lien on the “Notes Priority Real Estate” may account for the third lien noteholders’ treatment appearing relatively superior to the treatment of second lien noteholders.
MyTheresa
MyTheresa, a Munich-headquartered luxury retailer that Neiman acquired in 2014, is not a debtor. Nonetheless, it is an integral part of creditors’ considerations when evaluating the Neiman bankruptcy.
As reflected in the below summary organizational charts, the debtors designated entities holding their MyTheresa business as unrestricted subsidiaries under their credit facilities (in 2014) and under the indentures governing the unsecured notes (in 2017) and, in September 2018, distributed the MyTheresa operating companies to nondebtor parent Neiman Marcus Group Inc.
The distribution of the MyTheresa entities remains the subject of litigation between Neiman and certain of its creditors. However, in the 2019 recapitalization transactions the majority of Neiman creditors participated in exchange transactions in which participating creditors received credit support from the MyTheresa entities, while also agreeing to release Neiman from any and all claims relating to, among other things, the recapitalization transactions, the designation, and the distribution.
As a result of the recapitalization transactions, the second lien notes have a senior secured guarantee of up to $200 million by certain MyTheresa holding companies and the third lien notes have a first-priority pledge of 50% of the common equity interests of nondebtor MYT Holding Co., a holding company of the MyTheresa business. Neiman’s plan of reorganization provides that stakeholders’ economic and governance rights regarding MyTheresa would be consistent with such stakeholders’ prepetition rights, claims and controls.
Specifically, the plan provides that on the effective date, second lien noteholders would receive their share of a “2L MyT Distribution,” which would mean a security or instrument in form and substance to be agreed upon that memorializes the prepetition rights of second lien noteholders with respect to MyTheresa. The instrument would preserve the second lien noteholders’ rights under the limited guarantee.
Similarly, third lien noteholders would receive their share of a “3L MyT Distribution,” which would mean a security or instrument in form and substance to be agreed upon that memorializes the prepetition rights of third lien noteholders with respect to MyTheresa. The instrument would preserve the third lien noteholders’ rights in respect of the pledge of 50% of the common stock of MYT Holding Co.
Our analysis of potential recoveries under the Neiman plan estimates recoveries both with and without a contribution from MyTheresa.
The Neiman debtors disclosed in a filing on May 28 that an “extensive” third-party sales process in 2019 yielded a “highest and best bid” of approximately $520 million. The following estimate of recoveries, after including MyTheresa, uses a valuation of MyTheresa of $520 million in a high case, and a valuation of $320 million in a low case, predicated on the assumption that MyTheresa’s business, which is predominantly online, has not been adversely affected to an outsized extent by the Covid-19 pandemic.
Estimate of Plan Equity Value
As noted above, because of the fee structure incorporated in the DIP financing and exit facility financing, Neiman’s plan equity value plays a role in determining the allocation of post-reorganization equity to prepetition creditors. The debtors have not disclosed an estimate of plan equity value, necessitating an illustrative estimate in order to calculate post-reorganization equity splits.
The debtors disclose the equity value strike price for the warrants to be provided to the second lien noteholders - $2.025 billion - which is likely an upper limit for plan equity value. For illustrative purposes, we use the $2.025 billion strike price as an estimate of plan equity value. Ultimately, the plan equity value does not substantially change recoveries. Adjusting the plan equity value estimate to $1.5 billion reduces the allocation of post-reorganization equity to secured creditors, after dilution, to 56.3%, from 58.9%.
Rights to Participate in Financings
An analysis of the recoveries to Neiman’s secured creditors under its proposed plan is complicated by a portion of that recovery coming in the form of rights to participate in the debtors’ $750 million L+12% five-year exit facility as well as the option for secured lenders to participate in the debtors’ DIP facility. The following analysis estimates the value of those rights to term lenders, based on the debtors’ disclosures regarding the portion of the DIP and exit facility backstopped by term lenders, the term lender ad hoc group’s disclosure of its holdings, and assumptions regarding the participation in the exit facility by nonbackstop term lenders, the trading price of the debtors’ term loan, and the simplifying assumption that backstopping term lenders would only be responsible for the portion of the DIP and exit facility that nonbackstop term lenders do not subscribe to receive. The summary output of this analysis is shown below:
--Nick Williams
First Day Declaration
RSA
Restructuring Term Sheet
DIP Financing Motion
DIP Credit Agreement
Exit Facility Term Sheet
Plan
Disclosure Statement
Link to Excel Model
Neiman Marcus entered chapter 11 protection on May 7 with a restructuring support agreement supported by a significant majority of the company’s secured creditors. The following analysis details the terms of that RSA and estimates recoveries under the proposed plan for the various creditors in Neiman’s complex capital structure.
As will be discussed in more detail, while the RSA has broad support from secured creditor constituencies, a number of factors complicates any analysis of recoveries. These factors include uncertainty regarding the debtors’ plan equity value estimate, the need to include the possibility of recoveries from MyTheresa for second lien and third lien noteholders, and the significant dilutive impact of fees paid to DIP and exit facility backstop and commitment parties in post-reorganization equity. Our summary estimated recoveries under Neiman’s proposed plan construct are shown below.
The company’s prepetition capital structure, including MyTheresa, is shown below:
RSA Overview
Under the debtors’ RSA, headline distributions of post-reorganization equity to prepetition secured creditors, before any dilution, are as follows:
The debtors’ ABL and first-in, last-out, or FILO, loans would receive value equal to the allowed amount of such claim, “provided that such value shall not exceed the value of such holder’s interest in the estate’s interest in the property securing such Claims.” Treatment of general unsecured creditor claims is not specified under the RSA. Second lien noteholders would receive warrants for 25% of reorganized Neiman, struck at an equity value of $2.025 billion under the plan. These warrants are assumed to be out of the money and therefore are not included in the above image or accounted for directly as a source of dilution in the following analysis.
The RSA provides for a $675 million DIP facility - backstopped by the parties shown in the image below - and contemplates a $750 million exit facility backstopped by the same group.
The equity splits detailed above are significantly affected by the dilution proposed under the RSA. Specifically, the RSA contemplates:
- A DIP backstop fee equal to 6% of the DIP commitment amount, paid in post-reorganization equity in an amount equal to the dollar amount of the fee divided by 65% of “Plan Equity Value.”
- A DIP exit fee equal to 3% of the DIP commitment amount, also paid in post-reorganization equity in an amount equal to the dollar amount of the fee divided by 65% of plan equity value.
- An exit term loan fee equal to 6.5% of the exit facility commitment amount, paid in post-reorganization equity in an amount equal to the dollar amount of the fee divided by 65% of plan equity value.
- An exit term loan participation fee equal to 30% of Neiman Marcus post-reorganization equity, “payable ratably to each 2019 Term Loan Lender, 2013 Term Loan Lender, 2028 Debenture Holder, Second Lien Noteholder, and/or Third Lien Noteholder who participates in the Exit Facility, based on such party’s commitment percentage to fund the Exit Facility.”
Based on our estimate of plan equity value, as discussed in more detail below, the equity splits for prepetition secured creditors after adjusting for these sources of dilution are as follows:
Note that the above image reflects equity splits based on each secured creditors’ claim - that is, their allocation of post-reorganization equity prior to a decision to participate in the DIP financing and exit financing. Participation in the exit financing in particular will yield a significant increase in the allocation of equity to a given secured creditor, driven largely by a participation fee of 30% of the post-reorganization equity in Neiman. The 5% of post-reorganization equity allocated to a management incentive plan in the above image is an estimate as the debtors have not disclosed their proposed MIP at this point.
Neiman Valuation and Estimate of Chapter 11 Cash Flows
Relying on the debtors’ DIP budget and making the simplifying assumption that the budget, which runs through August 1, is a reasonable approximation of the debtors’ cash flows while in chapter 11 through their targeted emergence date in “early Fall 2020,” we estimate the following summary cash sources and uses:
Based on these sources and uses, we estimate the debtors would emerge with about $1.095 billion in net debt, consisting of the $750 million exit facility term loan, $370.4 million drawn under an ABL facility and $25 million in balance sheet cash. Relying on the debtors’ “Long Range Plan” projections, which estimate 2022 adjusted EBITDA of $361 million and unlevered free cash flow of $149 million (increasing to $426 million and $269 million, respectively, in 2023) we estimate an EV for Neiman of $2.166 billion at the midpoint, based on a 6x EV/EBITDA multiple.
The long range plan projections, a copy of which was reviewed by Reorg, are recreated below. Note that for valuation purposes, Reorg uses Neiman’s 2022 EBITDA estimate. According to the company’s estimate, adjusted EBITDA recovers from a low of $48 million in 2020 to $101 million in 2021 before reaching $361 million in 2022. According to the company’s estimates, 2023 adjusted EBITDA is expected to reach $426 million.
(Click HERE to enlarge image.)
Based on this valuation of Neiman’s post-reorganization equity, we estimate the following recoveries for secured creditors under the debtors’ proposed plan construct. Note that these estimates exclude recoveries from MyTheresa as well as any recoveries on account of the rights to participate in the exit facility and the option to participate in the DIP facility made available to secured creditors under the plan.
Neiman Collateral Waterfall
One interesting aspect of the proposed plan is the appearance, based on the above estimates, that third lien noteholders are receiving a higher recovery than second lien noteholders (before including MyTheresa and dependent on a valuation of the second lien warrants). As reflected below the Neiman third lien notes have a first lien on certain real estate. The recovery available to third lien noteholders from this collateral is capped at $200 million.
This first lien on the “Notes Priority Real Estate” may account for the third lien noteholders’ treatment appearing relatively superior to the treatment of second lien noteholders.
MyTheresa
MyTheresa, a Munich-headquartered luxury retailer that Neiman acquired in 2014, is not a debtor. Nonetheless, it is an integral part of creditors’ considerations when evaluating the Neiman bankruptcy.
As reflected in the below summary organizational charts, the debtors designated entities holding their MyTheresa business as unrestricted subsidiaries under their credit facilities (in 2014) and under the indentures governing the unsecured notes (in 2017) and, in September 2018, distributed the MyTheresa operating companies to nondebtor parent Neiman Marcus Group Inc.
The distribution of the MyTheresa entities remains the subject of litigation between Neiman and certain of its creditors. However, in the 2019 recapitalization transactions the majority of Neiman creditors participated in exchange transactions in which participating creditors received credit support from the MyTheresa entities, while also agreeing to release Neiman from any and all claims relating to, among other things, the recapitalization transactions, the designation, and the distribution.
As a result of the recapitalization transactions, the second lien notes have a senior secured guarantee of up to $200 million by certain MyTheresa holding companies and the third lien notes have a first-priority pledge of 50% of the common equity interests of nondebtor MYT Holding Co., a holding company of the MyTheresa business. Neiman’s plan of reorganization provides that stakeholders’ economic and governance rights regarding MyTheresa would be consistent with such stakeholders’ prepetition rights, claims and controls.
Specifically, the plan provides that on the effective date, second lien noteholders would receive their share of a “2L MyT Distribution,” which would mean a security or instrument in form and substance to be agreed upon that memorializes the prepetition rights of second lien noteholders with respect to MyTheresa. The instrument would preserve the second lien noteholders’ rights under the limited guarantee.
Similarly, third lien noteholders would receive their share of a “3L MyT Distribution,” which would mean a security or instrument in form and substance to be agreed upon that memorializes the prepetition rights of third lien noteholders with respect to MyTheresa. The instrument would preserve the third lien noteholders’ rights in respect of the pledge of 50% of the common stock of MYT Holding Co.
Our analysis of potential recoveries under the Neiman plan estimates recoveries both with and without a contribution from MyTheresa.
The Neiman debtors disclosed in a filing on May 28 that an “extensive” third-party sales process in 2019 yielded a “highest and best bid” of approximately $520 million. The following estimate of recoveries, after including MyTheresa, uses a valuation of MyTheresa of $520 million in a high case, and a valuation of $320 million in a low case, predicated on the assumption that MyTheresa’s business, which is predominantly online, has not been adversely affected to an outsized extent by the Covid-19 pandemic.
Estimate of Plan Equity Value
As noted above, because of the fee structure incorporated in the DIP financing and exit facility financing, Neiman’s plan equity value plays a role in determining the allocation of post-reorganization equity to prepetition creditors. The debtors have not disclosed an estimate of plan equity value, necessitating an illustrative estimate in order to calculate post-reorganization equity splits.
The debtors disclose the equity value strike price for the warrants to be provided to the second lien noteholders - $2.025 billion - which is likely an upper limit for plan equity value. For illustrative purposes, we use the $2.025 billion strike price as an estimate of plan equity value. Ultimately, the plan equity value does not substantially change recoveries. Adjusting the plan equity value estimate to $1.5 billion reduces the allocation of post-reorganization equity to secured creditors, after dilution, to 56.3%, from 58.9%.
Rights to Participate in Financings
An analysis of the recoveries to Neiman’s secured creditors under its proposed plan is complicated by a portion of that recovery coming in the form of rights to participate in the debtors’ $750 million L+12% five-year exit facility as well as the option for secured lenders to participate in the debtors’ DIP facility. The following analysis estimates the value of those rights to term lenders, based on the debtors’ disclosures regarding the portion of the DIP and exit facility backstopped by term lenders, the term lender ad hoc group’s disclosure of its holdings, and assumptions regarding the participation in the exit facility by nonbackstop term lenders, the trading price of the debtors’ term loan, and the simplifying assumption that backstopping term lenders would only be responsible for the portion of the DIP and exit facility that nonbackstop term lenders do not subscribe to receive. The summary output of this analysis is shown below:
--Nick Williams
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