Will Neiman Marcus Sting CPPIB and OMERS?

Lauren Hirsch of CNBC reports Neiman Marcus eyes Sunday bankruptcy filing, $600 million emergency funding:
Neiman Marcus could file for bankruptcy as soon as Sunday and is in talks with its current lenders about raising roughly $600 million in emergency financing to fund operations through the restructuring, people familiar with the situation tell CNBC.

In bankruptcy, the retailer will work to flush its more than $4 billion of debt leftover from its sale to Ares Management and the Canada Pension Plan Investment Board in 2013. Even before the coronavirus pandemic struck, that debt acted as an albatross, limiting its ability to invest in technology as new competitors like Yoox’s Net-A-Porter encroached on its once untouchable position in luxury retail.

Neiman Marcus is hoping its status as a luxury brand will help it emerge from the crisis a leaner and stronger company. The department store chain also owns high-end Bergdorf Goodman in New York’s midtown.

It does not plan to close any of its 43 Neiman Marcus stores as part of its planned Sunday bankruptcy filing, the people said. Still, retailers sometimes whittle down their store footprint while in bankruptcy.

Neiman Marcus previously announced plans to wind down its off-price chain, Last Call, and shutter the majority of its 24 stores by the first quarter of its fiscal 2021, to focus on luxury.

All of Neiman Marcus’ stores have been shut since March 17 due to the coronavirus. Most of its 14,000 workers have also been furloughed.

Hudson’s Bay Co., which owns Neiman Marcus competitor Saks, has been considered a logical suitor for Neiman Marcus, once it filed for a long-anticipated bankruptcy and shed itself of onerous debt. But with revenue for all retailers drastically reduced and markets rattled by the coronavirus, financing a large deal may be difficult.

Meantime, in bankruptcy, Neiman Marcus and its owners may need to deal with ongoing litigation with one of its bondholders, Marble Ridge Capital. The distressed debt fund has alleged that Neiman Marcus’ decision to carve out its MyTheresa website in a prior debt restructuring deprived the company’s creditors of a valuable asset. The firm, run by Daniel Kamensky, has said “it will take all necessary actions to protect its rights.” Neiman Marcus has dismissed the allegations, according to previous reports.

The people requested anonymity because the information is confidential. Neiman Marcus and Ares declined to comment. Hudson’s Bay Co. and CPPIB did not immediately respond to a request for comment.

Neiman Marcus will mark the first major retail bankruptcy of the coronavirus pandemic, which has jolted the economy and crippled the already struggling retail industry. It has also made the prospect of managing a bankruptcy a difficult one: it is hard to plan liquidation sales of select stores, or entire store bases, with nonessential retailers ordered shut. As various states make plans to begin lifting their coronavirus restrictions, retailers must decide how to handle varying mandates. 

Landlords, meantime, will be forced to assess the value of a retailer on its property with little insight as to how easily they can replace them.

A Neiman Marcus bankruptcy could deal a massive blow to Related Cos.′ glitzy Hudson Yards shopping mall in Manhattan, where the high-end department store is an anchor tenant, spanning multiple levels with a number of restaurant options. Should Neiman Marcus ever shut its store there, it could trigger requests for rent reductions from other retailers there or even an exodus of tenants.

A representative from Related did not immediately respond to CNBC’s request for comment.

Retail pain has accelerated throughout the industry. Gap warned in a filing this week that it may not have enough cash flow to sufficiently fund its operations and said that it is looking to renegotiate or defer the terms of its leases. The company also said it could provide “no assurances” it will be “able to recommence” business at existing leases at all. 

And while malls had in recent years sought to bring “experiential” options into properties, like gyms, those too have fallen under pressure as the government has recommended “social distancing” to manage the pandemic.

Similar questions may confront J.C. Penney, which is considering its own bankruptcy filing, people familiar with the matter told CNBC. Any potential bankruptcy filing for the department store, though, is at least a few weeks away. It has yet to finalize the detail of any bankruptcy plans and determine how much in bankruptcy financing it would need, people familiar with the matter tell CNBC.
Earlier this week, Reuters also reported on this developing story and stated this:
The bankruptcy filing could come within days, though the timing could slip, the sources said. Neiman Marcus skipped millions of dollars in debt payments last week, including one that only gave the company a few days to avoid a default.

Neiman Marcus’ borrowings total about $4.8 billion, according to credit ratings firm Standard & Poor’s. Some of this debt is the legacy of its $6 billion leveraged buyout in 2013 by its owners, private equity firm Ares Management Corp and Canada Pension Plan Investment Board (CPPIB). 

The sources requested anonymity because the bankruptcy preparations are confidential. Neiman Marcus and Ares declined to comment, while CPPIB representatives did not immediately respond to requests for comment.
This morning, I had a Skype interview with Ed Harrison of Real Vision who asked me about AIMCo's $3 billion volatility blowup and the Korea logistics deal involving APG and CPPIB.

Ed also asked me what will happen to CPPIB's investment in Neiman Marcus if it files for bankruptcy.

I told Ed the Neiman Marcus deal was a $6 billion co-investment with Ares Management back in 2013, keeping the company in private hands (at the time, private equity firms TPG Capital LP and Warburg Pincus LLC were exploring a possible IPO for Neiman, which they took private in 2005 for $5.1 billion.)

This investment has proved to be very difficult for CPPIB and Ares, its private equity partner. In March 2019, Ares mulled a GP-led restructuring of the company.

In December, both Ares and CPPIB faced serious charges of wrongdoing as Marble Ridge Capital, the distressed debt investor and a creditor of Neiman Marcus, accused them of fraudulently transferring approximately $1 billion in assets from the company.

As stated in the CNBC article above, the crown-jewel asset in question was the MyTheresa website which was carved out in a prior debt restructuring but Neiman dismissed the allegations.

Even before the pandemic hit, Neiman was heavily indebted to the tune of $4.8 billion and facing looming short-term debt maturities.

This liquidity crunch means Ares and CPPIB will likely step in to provide some form of bridge financing as the company explores restructuring under bankruptcy protection.

I'm speculating as I don't know exactly what CPPIB and Ares are doing but given that CPPIB has plenty of liquidity, I wouldn't be surprised if they are structuring some sort of deal to help Neiman weather the storm.

To be honest, I always found Neiman Marcus to be a beautiful high-end store but outrageously overpriced. I'm more of a Nordstrom guy but my wife assures me Neiman is an iconic brand which attracts high-end shoppers.

Why did CPPIB buy Neiman? Back in 2013, here is what Andre Bourbonnais said:
“If you look at where we are in the cycle, it’s a good time to buy this business,” said Andre Bourbonnais, senior vice president of private investments at CPPIB, one of Canada’s largest public pension funds and a global dealmaker whose assets including shopping malls, real estate and infrastructure.

“People feel more and more confident about the recovery in the U.S. and the sustainability of that recovery.” 

Bourbonnais praised Neiman’s management team and said the retailer would continue on a “business as usual” track, focused on strengthening its online retail business and looking for opportunities to expand the brand geographically.

“There are no immediate plans” to expand in Canada, he said. But Neiman would keep studying “when it’s advisable to come to Canada.” 
He wasn't wrong but if you look at consumer confidence today, it spells big trouble for retailers, especially over-indebted ones struggling to survive:

But a Neiman Marcus bankruptcy could spell even bigger trouble for Hudson Yards owned by Oxford Properties, OMERS's real estate subsidiary, and Related:
Neiman Marcus' looming bankruptcy is set to be a huge challenge for the ritzy new mall at Hudson Yards, potentially causing a domino effect of departures or lease renegotiations.

The luxury department store reportedly is on the verge of filing for bankruptcy protection, and that could be a mean a new lease deal with Related Cos. and Oxford Properties, which own the Hudson Yards mall where Neiman is the anchor tenant, Business Insider reports.

Related and Oxford cut a sweetheart deal with Neiman, paying for a pricey build-out and agreeing to take a cut of the department store's sales in lieu of rent, BI reports. But the wider issue is that some retailers have clauses in their own leases that give them the option to renegotiate or leave if Neiman packs up, according to the publication.

The Shops & Restaurants at Hudson Yards, which opened in March 2019, is closed because of the coronavirus pandemic. Retailers across the country are taking a massive hit from lockdown measures, and landlords say many of their retail tenants have not paid rent, a situation only set to get worse as April melts into May. Related CEO Jeff Blau, who has previously said that tenants who can pay their rent have an obligation to do so, told Bloomberg this week that he foresees a wave of defaults coming.

 “Once that ecosystem of rent to expenses to interest to the banks gets broken at one part of the chain, that’s going to become a problem," he told Bloomberg.
Real Estate Daily News also reports that Neiman Marcus threatens Hudson Yards Mall:
The anticipated bankruptcy of Neiman Marcus could throw Related and Oxford Properties’ Hudson Yards mall into peril. The move would put the developers in the precarious position of possibly having to renegotiate the retailer’s lease and enter into conversations with other retailers whose lease agreements are tied to Neiman’s presence, BI first reported.
  • Dig Deeper: The developers provided extremely favorable lease terms as they paid for the majority of the costs for building the store’s interior. They also reached an agreement to take 5 percent of sales instead of rent in the initial three years, and 8 percent in the following two years. The parties were reportedly planning to enter into a traditional rent arrangement starting in the sixth year of the lease.
  • E-commerce was already threatening: The brand was considered such a significant selling point that several other stores in the mall reached agreements in their leases that allowed for rent discounts or lease exits if Neiman were to go. Landlords were already losing leverage before the pandemic.
As you can see, if Neiman Marcus does file for bankruptcy, it will sting two big Canadian pensions.

It also exposes an even bigger issue plaguing the US and Canadian commercial real estate markets:

No doubt, there's a lot of pain in real estate markets, and that will come back to haunt all pensions.

Earlier this week, Wayne Kozun, former SVP at OTPP who is now CIO of Forthlane Partners, told me he expects "the biggest losses to come out of areas like private debt, real estate and private equity. But it will take years for those losses to come to light due to the smoothed nature of private market valuations."

I'm not sure it will take years as it's in pensions' best interests to take the losses as quickly as possible and then ride the wave up.

Anyway, we shall see, but there's no question private markets are getting slammed hard during this pandemic.

Below, Reuters reports Neiman Marcus Group is preparing to seek bankruptcy protection as soon as this week, becoming the first major US department store operator to succumb to the economic fallout from the coronavirus outbreak.

Also, earlier this week, former Saks CEO discussed the long-term impact of coronavirus on the retail industry. Great discussion, listen to what he says about Neiman Marcus and the recovery for the wider retail industry. "None of these businesses were built for a no revenue model."

Update: I spoke to a former senior pension manager who told me that CPPIB will lose its equity stake on this acquisition:
 "I don't know if it's $500 million or $750 million or more, but that will be wiped once Neiman files for bankruptcy and creditors get first liens on assets. CPPIB can absorb these losses and might have already taken a writedown on Nieman as it was in trouble for a long time. However, they did another deal with Ares back in 2013 acquiring 99 Cents Only stores that was valued at US $1.6 billion. Not sure how well that is going."
I thank this person for his insights.