Mon 07/27/2020 06:00 AM
Relevant Documents:
UCC Report

UCC Report Appendices:
Appx 1 (Initial Lazard Jan. 2017 Presentation)
Appx 2
Appx 3 (MyTheresa Information Memorandum, Lazard March 2017 Presentation)
Appx 4
Appx 5
Appx 6
UCC Expert Report / Executive Summary
Sponsor Counter-Report
Sponsor Report Appendix

The official committee of unsecured creditors in the Neiman Marcus chapter 11 cases filed publicly on Friday evening, July 24, its much-anticipated initial report on the bankruptcy estates' litigation claims against Neiman Marcus Group, its equity sponsors, the directors of Neiman Marcus Group and other parties. The UCC asserts that the September 2018 distribution of MyTheresa was a constructive and actual fraudulent transfer and that the MyTheresa asset (or its value) can be recovered by the debtors' estates. The committee concludes that “the Estates must seek to pursue and recover the MyTheresa Asset (or the value thereof), which could potentially yield hundreds of millions of dollars of value for the Estates” (emphasis added).

The UCC report emphasizes that if the transfer of the MyTheresa Asset is avoided, the result is that “the Debtors’ estates will control the MyTheresa Asset.” As a consequence, the committee says, the debtors’ estates would be augmented by value from the MyTheresa asset equal to: (i) approximately the first $250 million in net proceeds in excess of approximately $450 million (i.e., after accounting for payment of $200 million to the second lien noteholders and approximately $250 million to the third lien noteholders) and (ii) 50% of any net proceeds generated in excess of approximately $700 million. “Although the precise value of the MyTheresa Asset may be undetermined as of the effective date of a chapter 11 plan,” the UCC concludes, “the potential value derived from that asset in the event that it is recovered by the Debtors’ estates will be hundreds of millions of dollars."

Sponsors Ares Management Corp. and the Canada Pension Plan Investment Board, or CPPIB, filed a counter-report to the UCC’s initial report. According to the counter-report, “The Committee’s conclusion that the MyTheresa Transactions were fraudulent or improper is thoroughly undermined by the sweeping acceptance of those same transactions by the vast majority of the Company’s debt holders, who are likewise not draining the estate’s resources by challenging those transactions here” (emphasis added). The sponsors call the UCC report “not an objective analysis by an estate fiduciary, but an advocacy piece and leverage play.” The filing says that the UCC has failed to conduct an objective investigation, instead turning the report into a “vehicle to support a pre-determined outcome by a group whose only objective is to shift value to itself."

A hearing on the debtors’ disclosure statement and the UCC’s exclusivity termination motion, as well as the debtors’ store closing motion, is scheduled for tomorrow, Tuesday, July 28, at 3 p.m. ET. Last week, the ad hoc secured noteholder committee indicated that “important negotiations remain ongoing among the Debtors, the Ad Hoc Secured Noteholder Committee, and other relevant stakeholders in respect of the 2L MyT Distribution and the 3L MyT Distribution.”

UCC Preliminary Report

The UCC says that the September 2018 distribution of the MyTheresa asset from the debtors to non-debtor Neiman Marcus Group Inc., or NMG Parent, was designed for the “express purpose” of “moving certain assets with strategic value ... outside of the loan party group” in order to “maximize the long-term value” for sponsors. Moreover, the report says that there is “no doubt” that the plan to siphon value from the debtors and transfer assets outside the reach of their creditors was directed by the sponsors.

“Tellingly,” says the committee in a heavily redacted section of the report, both sponsors “dramatically” marked down the value of their respective $650 million investments in the debtors beginning in 2016. Ares’ internal valuations and whether they should remain under seal were a heavily debated point at a hearing in the cases last Thursday.

The UCC also notes that the debtors’ public debt began trading below par in 2016 and their corporate family credit rating was downgraded by two notches to Caa2 by Moody’s in March 2017. In contrast, MyTheresa was and is still “booming,” the filing remarks. The UCC points out that its expert Dr. Israel Shaked of the Michel-Shaked Group has concluded in his report that MyTheresa had a positive equity value of $675 million in March 2017, while the debtors (even including MyTheresa) had an equity value of negative $1.198 billion at the same time. Even the sponsors’ financial advisor, Lazard, prepared valuation materials reflecting a negative equity value for the Debtors (excluding MyTheresa) as of early 2017, says the report.

According to the UCC, although the transfer of the MyTheresa asset ultimately was structured as a distribution from the debtors to NMG Parent, the sponsors’ “true intentions were set forth in an October 30, 2017 email from Ares to Lazard, in which Ares stated, ‘... There’s obviously sensitivity because we’re confidentially still trying to dividend out MT but the company is unaware’” (emphasis added). Citing Lazard’s initial presentation to the sponsors in January 2017, the committee says that the sponsors were aware that the transfer of the MyTheresa asset out of the debtors’ ownership, “whether to NMG Parent or to the Sponsors themselves, would implicate fraudulent transfer, fiduciary duty and illegal distribution concerns.”

The report also emphasizes that in September 2018, the board of directors of NMG Parent consisted of 10 directors selected by the sponsors. Three of the directors were designated solely by Ares, including its co-founder, David B. Kaplan, three of the directors were designated solely by CPPIB, three of the directors were jointly designated by both sponsors, and the final director – the CEO of NMG Parent – was (as an officer) selected by the board. NMG Parent was the only entity involved in the distribution that had a “traditional” board of directors, says the filing, as each debtor involved in the distribution was a single-member, member-managed LLC organized under Delaware law, and the sole member (and manager) of each of those debtors was another entity, not a “traditional” board of directors.

In other words, the individual members of NMG Parent’s board were the only natural persons charged with exercising the fiduciary duties owed by the debtors’ managers, under Delaware law and pursuant to the debtors’ operating agreements, says the report. The UCC asserts that it has not seen “any evidence” indicating that the directors gave any consideration to the duties they owed to the debtors based on their control over the debtors. Instead, the meeting minutes reflect that the key considerations were advancing the sponsors’ interests and insulating the sponsors, NMG Parent and the directors from liability, says the filing. The distribution was approved by NMG Parent’s board on Sept. 14, 2018 and the MyTheresa asset was distributed to NMG Parent that same day, pursuant to various written consents, the committee adds.

The UCC report also recounts the agreement in or around March 2019 between the debtors, NMG Parent, the sponsors, more than 99% of the debtors’ term loan lenders and approximately 91.5% of the debtors’ unsecured noteholders regarding the principal terms of a new restructuring proposal and their entry into a transaction support agreement, or TSA.

As set forth in the Shaked report, says the UCC, the MyTheresa asset was worth $822 million as of Sept. 14, 2018, when it was transferred to NMG Parent. The MyTheresa asset continued to appreciate in value, to $976 million as of the May 7 petition date, the committee states. The report adds that Shaked has determined that the value of the MyTheresa asset as of Sept. 1, 2020, is $925 million.

The Distribution is a Constructive and Actual Fraudulent Transfer, and the MyTheresa Asset (or Its Value) Can Be Recovered by the Debtors’ Estates

The UCC asserts that the distribution of the MyTheresa asset from the debtors to NMG Parent in September 2018 is avoidable as a constructive fraudulent transfer under section 548(a)(1)(B) of the Bankruptcy Code, and the MyTheresa asset (or its value) should be recovered, for the benefit of the debtors and their estates, from NMG Parent, the MYT entities and/or the sponsors pursuant to section 550 of the Code.

Both elements of a constructive fraudulent transfer claim can readily be established, says the report. First, the debtors did not receive anything of value in exchange for the distribution, which was structured as an equity distribution of the MyTheresa Asset to NMG Parent, and the debtors “have conceded as much,” the UCC argues. The report also notes that Shaked has concluded that the debtors were insolvent by $785 million on Sept. 14, 2018 just prior to the transfer, were insolvent by $1.608 billion on Sept. 14, 2018, after the transfer, and remained insolvent thereafter.

Upon avoidance of the distribution, the report argues, the MyTheresa asset or its value will be recoverable, pursuant to section 550(a) of the Bankruptcy Code, from NMG Parent (as the initial transferee) and from the MYT entities (as subsequent transferees). The value of the MyTheresa asset also will be recoverable from the sponsors as entities “for whose benefit” the distribution was made, the UCC concludes.

While shareholders are generally not liable for transfers to the entity they own based solely on their status as shareholders, the report asserts, courts have determined that shareholders are entities for whose benefit such transfers are made where, as here, they both benefited from and knowingly participated in the fraudulent transfer. The UCC says that its investigation has already “revealed extensive evidence showing the Sponsors not only designed and orchestrated the Distribution, but were the intended and actual beneficiaries.”

In addition, the UCC contends that the MyTheresa distribution is avoidable as an actual fraudulent transfer under section 548(a)(1)(A) of the Code. Under this theory, the MyTheresa asset (or its value) should likewise be recovered from NMG Parent, the MYT entities and/or the sponsors pursuant to section 550, says the filing. According to the committee, there is a “clear expression of intent” to hinder, delay or defraud the debtors’ creditors in this case. Although likely unnecessary, there is also extensive evidence to support the “badges” of fraud and other similar inferences, the report adds. The UCC calls the distribution a “brazen asset grab” by the sponsors to “salvage their distressed investment” at the expense of the debtors and their creditors.

The Committee Has Investigated Other Potential Fraudulent Transfer Claims That Do Not Appear to Be Actionable

The UCC says it has also assessed (i) the designation by which Lux I and its subsidiaries were designated as unrestricted subsidiaries under the unsecured notes (ii) and the PropCo transaction in March 2017, during which NMG LLC contributed three parcels of real property to PropCo. Based on its investigation to date, the UCC says it has concluded that neither transaction is actionable as a fraudulent transfer.

The report says that the designation did not constitute a fraudulent transfer because the designation was not a “transfer” of any interest of the debtors in property. The designation merely characterized MyTheresa as an unrestricted asset for purposes of the unsecured notes, was not “estate depleting” and is unlikely to form the basis of a high-value claim by the estates, says the UCC. As for the PropCo transaction, the filing says that it appears to have been a “fairly typical sale-leaseback transaction” that did not remove assets from the debtors, as it involved the transfer of assets to an unrestricted subsidiary that remained within the debtors’ ownership structure.

The Estates Have Additional State Law Claims Against Certain Litigation Targets

The UCC contends that in addition to their fraudulent transfer claims under the Bankruptcy Code, the estates can assert state law claims against the litigation targets, including an illegal distribution claim, claims for breach of fiduciary duty, and claims for aiding and abetting a breach of fiduciary duty. The additional state law claims “likely would meaningfully enhance the amount of actual damages recoverable by the Estates only if the Estates do not recover, through their constructive or actual fraudulent transfer claims, the MyTheresa Asset or its value.” In a footnote, the report says that to the extent any litigation target asserts that the state law claims were released in the TSA, the releases themselves may be avoidable as constructive fraudulent transfers.

Prosecution of the Litigation Claims Will Benefit the Estates

The UCC insists that prosecution of the litigation claims laid out in the report would benefit the estates. First, the report addresses the turnover provision in section 9.06(a) of the TSA, with the committee arguing that the sponsors and NMG parent cannot enforce this provision against the estates as to recoveries obtained through the estates’ avoidance claims. This is because the avoidance claims are “creditor claims” and, in asserting those claims, the estates do not “stand in the shoes” of the debtors, the UCC argues. Moreover, if the turnover provision was enforced against either the estates or any consenting noteholders, it would allow NMG Parent and the sponsors “to retain the fruits of an intentional fraudulent transfer that they orchestrated to the same extent as if the transfer had not been avoided,” the committee argues. Further, the turnover provision could be avoided altogether by recovering the value of the MyTheresa asset against the sponsors as entities for whose benefit the transfer of the MyTheresa asset was made, the report asserts.

The UCC maintains that recovery of the MyTheresa asset (or the value thereof) would benefit the debtors’ estates and unsecured creditors generally because the MyTheresa asset is, and was at all relevant times, worth at least hundreds of millions of dollars. If successful on their claims to recover the MyTheresa asset or its value, the debtors’ estates would regain control of the MyTheresa asset (or recover its value). According to the report, the possible assertion of deficiency claims by secured noteholders against the estates does not change this analysis. That is, a chapter 11 plan in this case could “mirror the distribution that would be made under the MYT Waterfall as it relates to the 2L Noteholders and the 3L Noteholders – regardless of the outcome of litigation to recover the MyTheresa Asset or its value – with the goal of being value-neutral as to those creditors.”

“Most importantly,” says the UCC, if the MyTheresa asset (or the value thereof) is recovered, nothing would be distributed to NMG Parent on account of its ultimate ownership of the series B preferred stock or the common stock of MYT Holding. As a result of having the MyTheresa asset (or its value) restored to the debtors’ estates, the filing highlights, none of the proceeds of such asset (whenever those proceeds may be realized) would be received by MYT Holding (the entity whose series B preferred stock and common stock are ultimately owned by NMG Parent). The UCC emphasizes that instead, the value derived from the net proceeds of the MyTheresa asset that otherwise would be appropriated by NMG Parent on account of the series B preferred stock and the common stock of MYT Holding would be retained by the debtors’ estates for the benefit of unsecured creditors.

UCC Initial Expert Report / Executive Summary

The UCC’s initial expert report, submitted by the Michel-Shaked Group, concludes that Neiman was insolvent as of March 14, 2017 (the date of the designation of MyTheresa as an unrestricted subsidiary) and Sept. 14, 2018 (the date of the distribution of MyTheresa). The report further finds that Neiman remained insolvent from the distribution through its bankruptcy filing.


The report uses comparable company valuations for a 50% weighting in determining Neiman’s valuation, with the other 50% weighting based on discounted cash flow valuation. The comparable companies used in the report were Dillards, Hudson Bay, J.C. Penney, Kohl’s, Macy’s and Nordstrom, with the report noting that Neiman is “not a luxury brand” and “the cost structure and operating margins of NMG are vastly different from luxury brand companies, and are similar to other U.S. department stores.”

The report notes that it considered using management projections in its DCF analysis, but that it concluded that “management’s projected revenue and EBITDA, as of March 2017 and September 2018, were unreasonable and should be adjusted downward accordingly.” The inputs for the DCF valuation are shown below:


The report finds that the value of MyTheresa ranged from $675 million in March 2017 to $976 million in May 2020.


The report also critiques Neiman CFO Adam Orvos’ Sept. 2018 solvency opinion and Duff & Phelps’ March 2017 and April 2018 valuations of MyTheresa. Orvos’ opinion was “flawed, incorrect, and significantly overstates the fair market value of NMG’s assets,” according to the report, while Duff & Phelps’ valuation of MyTheresa was “flawed, incorrect,” and “based on unreasonable assumptions” which resulted in the value of MyTheresa being “significantly understated.”

The report notes that the Duff & Phelps valuation of MyTheresa in March 2017 - €265 million - was based on “assumed projected EBITDA margins that were far lower than management forecasts at the time, and were even lower than projections used by D&P in other valuations undertaken in the time periods prior to and following March 2017.”

These “artificially low” projected EBITDA margins are summarized in the following table in the report:


UCC member Marble Ridge Capital provided the following statement to Reorg regarding the March 2017 valuation of MyTheresa:

“We now have confirmation that the Neiman valuation of MyTheresa performed by Duff & Phelps that was used to justify the redesignation transactions was ‘artificially low’. Accepting the UCC’s expert opinion of the concluded valuation of MyTheresa at the time of the redesignation, Neiman Marcus would not have had sufficient capacity under its indentures to make the redesignation - which is one of the many concerns Marble Ridge has been raising over and over again the last 2 years.”

Sponsors’ Counter-Report

The Neiman Marcus sponsors, Ares and the Canada Pension Plan Investment Board, or CPPIB, filed a counter-report to the UCC’s report on Friday, saying the documents relied upon by the UCC in coming to its determination consisted of internal drafts, preliminary and unverified analyses, and isolated emails presented “completely out of context.” The counter-report says the UCC report should be “seen for what it is: not an objective analysis by an estate fiduciary, but an advocacy piece and leverage play submitted in service of a predetermined outcome.”

The counter-report asserts that Neiman’s board “at all times acted to maximize value not just for the Sponsors, but for the entire enterprise.”

Responding to the UCC’s assertions of Neiman’s insolvency “as far back as 2017,” the counter-report notes the “undisputed fact” that Neiman paid all of its debts as they came due, including all principal, interest, and trade credit, up until the Covid-19 pandemic forced Neiman to close its retail operations. The counter-report suggests that “but for the pandemic,” Neiman would still be operating and paying its debts, the debtors would not be in chapter 11, and “there still would be no claims for alleged fraudulent transfer.”

The report points to an improvement in operations between the designation of MyTheresa in 2017 and the distribution in September 2018, highlighting six “consecutive quarters of significantly improved operating results.

Turning to the UCC’s expert report, the sponsors critique the UCC expert’s decision to use his own projections instead of management projections, saying the expert’s analysis is “a market multiple analysis dressed in DCF garb” which “will be rejected by this Court when presented.” Further, says the counter-report, the UCC’s expert fails to account for the fact that in the four quarters before the distribution, “concurrent with significant changes in the Company’s management team,” management had “exceeded” projections. According to the counter-report, the UCC’s expert “ignores that this critical management turnover significantly enhanced the reliability of the Company’s projections because the results of a DCF analysis using those more appropriate numbers points to a conclusion the Committee is determined not to accept: solvency.” The counter-report also takes issue with the UCC expert’s selection of department stores as comparable companies, saying that Neiman “should be valued well above the discount-value based comps deliberately selected” by the expert.

The counter-report takes issue with the UCC’s “attacks” on Neiman CFO Adam Orvos’ solvency opinion. According to the counter-report, the UCC “go to great lengths to paint the Company’s entire finance team as unreliable when it came to financial forecasting” whereas, according to the sponsors, the UCC “fails to mention” testimony defending the company’s forecasting abilities.

The counter-report responds to the UCC’s assertion that the company’s lack of a third-party solvency opinion at the time of the distribution “is evidence of its insolvency,” saying that such an opinion was indisputably not required and “because the Company had pending maturities of billions of dollars on its debt facilities, no third-party solvency opinion provider, like Duff & Phelps, could assume, as a technical matter for the purposes of issuing a solvency opinion, that the Company would complete an extension of those maturities (even though those extensions in fact were readily obtained).” The counter-report points instead to testimony from Lazard, that, “in no uncertain terms,” the company would be able to complete an amend and extend process for its pending debt maturities “if the Distribution were made” (emphasis added).

Lazard Managing Director Tyler Cowan is quoted as saying:

“We were asked by [Mr. Orvos] and the board to advise [in September 2018] with respect to one specific topic which was, from our perspective ... do we think the company would be able to address its ... debts as they come due, or said another way, its maturities in October 2020 and 2021. And our advice was unequivocally yes, on the account of [the fact that the] company had a lot of tools at its disposal to negotiate for and effectuate in an amend-and-extend transaction, both in term loans and unsecured notes.”

The counter-report asserts that the UCC cites “not a single document that indicates that anyone at the Company, the Sponsors, or on the Board thought that the Company was insolvent in September 2018.”

Moving on from the UCC’s “incorrect claim that the Distribution occurred at a time the Company was insolvent, and was thus constructively fraudulent,” the counter-report turns to the UCC’s assertions that the distribution of MyTheresa constituted intentional fraud or breach of fiduciary duties because the Distribution provided no benefits to the Neiman Marcus enterprise. According to the counter-report, it was the view of Neiman’s board that that taking MyTheresa out of the credit group, but at all times keeping it within the Neiman Marcus ecosystem, “was a benefit to the entire enterprise, including to the Debtor entities and the MyTheresa entities.” The counter-report points to a lack of synergies between the two businesses, compensation alignment, ability for MyTheresa to raise capital, the alleviation of “concerns of MyTheresa’s vendors and counterparties,” and “the impetus that permitted the Company to negotiate a refinancing of all of the Debtors’ credit facilities” as reasons that the distribution benefited the “entire enterprise.”
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