Neiman Marcus Group LTD LLC – Iconic Retailer Succumbs to Coronavirus and Files Chapter 11, Announces RSA with Two-Thirds Debtor Support, $675mn DIP Financing, $750mn Exit Financing, $4bn Debt Reduction, Fall 2020 Emergence

May 7, 2020 – Neiman Marcus Group LTD LLC  and 23 affiliated Debtors (“Neiman Marcus ” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Southern District of Texas, lead case number 20-32519. The Debtors, a luxury, multi-branded, omni-channel fashion retailer, are represented by Matthew D. Cavenaugh of Jackson Walker LLP. Further Board authorized engagement include (i) Kirkland & Ellis LLP as general bankruptcy counsel, (ii) Berkeley Research Group as financial advisors, (iii) Lazard Ltd. as investment bankers and (iv) Stretto as claims agent. 

Further non-debtor engagements include (i) Wachtell, Lipton, Rosen & Katz and Ducera Partners LLC as legal counsel and investment banker, respectively, for the Extended Term Loan Lenders  and (ii) Paul, Weiss, Rifkind, Wharton & Garrison LLP and Houlihan Lokey as legal counsel and investment banker, respectively, for the Noteholders.

The Debtors’ lead petition notes between 50,000 and 100,000 creditors; estimated assets between $1.0bn and $10.0bn; and estimated liabilities between $1.0bn and $10.0bn. Documents filed with the Court list the Debtors’ five largest unsecured creditors as (i) UMB Bank N.A. (as Trustee fo $80.6mn senior notes), (ii) UMB Bank N.A. (as Trustee fo $56.6mn senior notes), (iii) Monument Consulting ($10.4mn professional services claim), (iv) Rakuten Marketing LLC ($7.8mn trade debt claim) and (v) Chanel Inc. ($6.0mn trade debt claim). Other trade creditors on the hook (although perhaps fashion brands may be clamoring to get on this Who's Who of 20th century fashion) include: Gucci America ($3.2mn), Dolce & Gabana ($2.7mn), Christian Laboutin ($2.3mn), Sisley Cosmetics ($2.2mn), Yves Saint Laurent ($2.2mn), Burberry USA ($2.0mn), Versace USA ($1.5mn), (Prada USA ($1.4mn), Giorgio Armani ($1.4mn), Jimmy Choo ($1.2mn), Manolo Blahnik ($1.0mn) and Givenchy Corp ($1.0mn).

Overview of the Restructuring

• Certain of the Company's largest creditors have committed to fulfill $675 million in DIP financing during the Chapter 11 proceedings. 
• These creditors have also committed to fulfill a $750 million exit financing package that would fully refinance the DIP financing and provide additional liquidity for the business. 
• Upon emergence, the Company's planned capital structure is anticipated to be long dated with no near-term maturities and to eliminate approximately $4 billion of its existing debt. 
• The transaction is supported by the Company's existing shareholders and, pursuant to the agreement, the creditors participating in the RSA will become the majority owners of the Company. 
• Prior to the commencement of the Chapter 11 proceedings, new boards of managers were established at two debtor entities, Mariposa Intermediate Holdings LLC and Neiman Marcus Group LTD LLC, to lead the debtors through the restructuring process. Each board of managers is chaired by Mr. van Raemdonck and includes at least one independent manager. 
• The Company expects to emerge from the process in early Fall 2020. 
• Mytheresa is not a part of the Chapter 11 proceedings and will continue to operate independently.

In a press release announcing the filing, the Debtors advised that “announced that it has entered into a Restructuring Support Agreement (“RSA”) with a significant majority of its creditors to undergo a financial restructuring, substantially reducing its debt load and interest payments and supporting continued operations during the COVID-19 pandemic and beyond. The binding agreement with holders representing over two-thirds of the Company’s outstanding debt demonstrates broad commitment across creditor classes."

Restructuring Support Agreement

The Weinstein Declaration (defined below and which attaches the RSA at Exhibit B) provides: “The Restructuring Support Agreement has a remarkable level of support throughout the Debtors’ capital structure: holders of approximately 78 percent of the Debtors’ first lien term loan debt, 99 percent of the Debtors’ second lien notes debt, 70 percent of the Debtors’ third lien notes debt, 78 percent of the Debtors’ debentures, and 100 percent of the direct equity ownership in the Debtors have committed to support the Debtors’ restructuring. Even more support is anticipated in the coming days as parties contemplate signing joinders.

The Restructuring Support Agreement contemplates a comprehensive reorganization achieved through the Plan…that will result in a substantial deleveraging of the Debtors’ balance sheet by as much as $4 billion and provide the Debtors with $750 million of fully-committed new capital. The key financial components of the restructuring are as follows:

• access to the DIP Facility, in an aggregate principal amount of $675 million, which shall bear interest at a rate of LIBOR plus 12.75% (payable monthly in cash), and matures at the earlier of 5 months from the Petition Date (subject to an extension option) or consummation of a chapter 11 plan of reorganization; and
• access to a commitment for the post-effective date Exit Facility in aggregate principal amount of $750 million, backstopped by the Term Loan Lender Group (excluding holders of 2028 Debentures), the Noteholder Group, and any other Extended Term Loan lenders, holders of 2028 Debentures, holders of Second Lien Notes, and holders of Third Lien Notes who execute the Restructuring Support Agreement within seven business days of the Petition Date, which will be used to refinance the term loans under the DIP Facility. 

The Restructuring Support Agreement contemplates stakeholder recoveries as follows pursuant to a plan of reorganization to be filed in these chapter 11 cases to implement the Restructuring Support Agreement (the ‘Plan’):

• each holder of Extended Term Loans, 2013 Term Loans, 2028 Debentures, Second Lien Notes, and/or Third Lien Notes will be eligible to participate in the DIP Facility pursuant to the syndication procedures;
• holders of claims on account of the Asset-Based Revolving Credit Facility and FILO Facility will receive value, as of the effective date of the Plan, equal to the allowed amount of such claims, as applicable;
• holders of 2019 Term Loan Claims shall receive their pro rata share of and interest in (a) 87.5 percent of the reorganized equity (subject to dilution) and (b) 87.5 percent of the rights to participate in the Exit Facility (the ‘Rights’), subject, in each case, to upward adjustment if the holders of 2013 Term Loan Claims do not vote in favor of the Plan;
• if the class of 2013 Term Loan Claims votes in favor of the Plan, holders of 2013 Term Loans shall receive their pro rata share of and interest in (a) 0.2 percent of the reorganized equity (subject to dilution) and (b) 0.2 percent of the Rights, or, if the class of 2013 Term Loan Claims does not vote in favor of the Plan, holders of 2013 Term Loan Claims will receive value, as of the Effective Date of the Plan, equal to the allowed amount of such claims not to exceed the value of each holder’s interest in the estate’s interest in the property securing such claims; 
• holders of 2028 Debentures Claims will receive their pro rata share of and interest in (a) 2.8 percent of the reorganized equity and (b) 2.8 percent of the Rights, subject, in each case, to upward adjustment if the holders of 2013 Term Loan Claims do not vote in favor of the Plan;
• holders of Second Lien Notes Claims shall receive their pro rata share of and interest in (a) 1.0 percent of the reorganized equity, (b) 1.0 percent of the Rights, and (c) seven-year warrants (no Black-Scholes protection) to purchase up to 25.0 percent of the reorganized equity at an agreed-upon strike price; 
• holders of Third Lien Notes Claims shall receive their pro rata share of and interest in (a) 8.5 percent of reorganized equity (subject to dilution) and (b) 8.5 percent of the Rights; 
• holders of general unsecured claims shall receive their pro rata share of a cash pool; and
• stakeholders’ economic and governance rights with respect to MyTheresa shall be consistent with such stakeholders’ prepetition rights, claims, and controls."

Events Leading to the Chapter 11 Filing

In a declaration in support of the Chapter 11 filing (the “Weinstein Declaration”), Marc Weinstein, the Debtors’ Chief Restructuring Officer, detailed (barely) the events leading to the Debtors’ Chapter 11 filing; touching briefly on negative macroeconomic trends, which only a few short months ago dominated headlines reporting on the “retail apocalypse” before jumping aboard the COVID-19 ambulance-wagon. Generally these “Events Leading…” disclosures can be divided into two camps, genuine mea culpas and self-promoting explanations that more properly belong in an IPO selling document than in a Chapter 11 filing; this declaration definitely tilts towards the latter approach. 

The Weinstein Declaration states: “While NMG has been proactive in addressing changing trends, it faces the same macro-trends that have crippled many apparel and retail companies, including a general trend from brick-and-mortar to online retail channels and a shift in consumer demographics. Recognizing this, after the Recapitalization Transactions, but prior to the COVID-19 temporary store closures, the Debtors immediately implemented a series of cost-saving and cash conservation initiatives to grow their profit margins and address their debt obligations. These initiatives included, among others, expense reduction, contract renegotiations, reduced capital expenditures, optimization of the Debtors’ merchandise inventory, labor-force realignment and real estate monetization. As a result of these initiatives, the Debtors were on pace for $90 million in cost savings and a $100 million increase in liquidity by July 2020, on top of $100 million in additional liquidity obtained in the first half of fiscal year 2020. The Debtors paid all of their vendors on time and in full in the ordinary course of business."

DIP Financing

The Debtors filed an emergency motion requesting Court authority to access $675.0mn of debtor-in-possession (“DIP”) financing and use cash collateral [Docket No. 104].

The expensive DIP financing (interest rates and fees totaling more than 20%) is backstopped by parties to the Debtors restructuring support agreement and has Cortland Capital Markets Services LLC acting as administrative agent It will be made available in three tranches: (1) $275.0mn upon issuance of an interim DIP order (that to happen within 3 days of the Petition date), (ii) $250.mn on the issuance of a final DIP order and (iii) $150.0mn 120 days after the Petition date. The DIP financing does not include a roll-up and does not "prime any creditors without their consent." 

On the subject of the alternative DIP financing much discussed in the weeks before the Debtors' Chapter 11 filings  (a group led by Mudrick Capital Management LP and hedge fund Third Point LLC reportedly offering $700.0mn of DIP financing on the condition that the Debtors embark on an immediate sale process) the Debtors' DIP motion states that it: "lacked the support of a majority lenders under the Term Loan Facility, was not fully committed, and therefore did not provide the same certainty and stability as the Term Loan Lender Group’s proposal…was not actionable because, among other things, the proposal required a protracted, costly, and difficult priming fight at the outset of these chapter 11 cases with little chance at success."

Prepetition Capital Structure

As of the Petition date, the Debtors’ had outstanding funded-debt obligations in the aggregate principal amount of approximately $5.1bn, including:

1. a $900.0mn senior secured asset-based revolving credit facility (the “Asset-Based Revolving Credit Facility”), of which $749.0mn has been drawn; 
2. a $100.0mn last-out term loan facility (the “FILO Facility”); 
3. a $2,253.1mn senior secured term loan facility (the “Term Loan Facility”), which is comprised of $12.6mn outstanding of stub term loans with the original maturity date of October 25, 2020, $1,193.8mn outstanding of term loans with an extended maturity date of October 25, 2023, which pay interest entirely in cash, and $1,046.7mn outstanding of term loans with an extended maturity date of October 25, 2023, which pay interest partially in cash and partially in kind; 
4. $561.7mn aggregate principal amount of 14.000% Second Lien Notes due 2024 (the “Second Lien Notes”); 
5. $730.5mn aggregate principal amount of 8.000% Senior Secured Third Lien Notes due 2024 (the “8.000% Third Lien Notes”); 
6. $497.8mn aggregate principal amount of 8.750% Senior Secured Third Lien Notes due 2024 (the “8.750% Third Lien Notes” and, together with the 8.000% Third Lien Notes, the “Third Lien Notes”); 
7. $80.7mn aggregate principal amount of 8.000% Senior Cash Pay Notes due 2021 (the “Unsecured Cash Pay Notes”); 
8. $56.6mn aggregate principal amount of 8.750%/9.500% Senior PIK Toggle Notes due 2021 (the “Unsecured PIK Toggle Notes” and, together with the Unsecured Cash Pay Notes, the “Unsecured Notes”); and 
9. $125.0mn aggregate principal amount of 7.125% Senior Debentures due 2028.

About the Debtors

Neiman Marcus Group is a luxury, multi-branded, omni-channel fashion retailer conducting integrated store and online operations under the Neiman Marcus, Bergdorf Goodman, Neiman Marcus Last Call, and Horchow brand names. For more information, visit http://www.neimanmarcusgroup.com.

The Weinstein Declaration adds: "For over 100 years, the Debtors have been the leader in retail luxury, innovation, and customer experiences. Since opening in 1907 with just one store in Dallas, Texas, the Debtors have strategically grown to 67 stores across the United States, including their marquee luxury Neiman Marcus and Bergdorf Goodman locations, Horchow e-commerce website, and off-price Last Call stores. Each Neiman Marcus and Bergdorf Goodman store offers a distinctive selection of apparel, handbags, shoes, cosmetics, and precious and designer jewelry from premier luxury and fashion designers. Horchow offers luxury home furnishings and accessories, and Last Call provides a more affordable option for price-sensitive yet fashion-minded customers. To complement its store footprint, NMG operates the largest luxury e-commerce platform in the world. More than 30 percent of NMG’s total annual revenue is from online sales."

Corporate Structure Chart (see page 42 of the Weinstein Declaration)

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