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Fitch Places Neiman Marcus on Rating Watch Negative
September 11, 2013 / 3:23 PM / 4 years ago

Fitch Places Neiman Marcus on Rating Watch Negative

(The following statement was released by the rating agency) NEW YORK, September 11 (Fitch) Fitch Ratings has placed Neiman Marcus, Inc.'s and The Neiman Marcus Group, Inc.'s (together, Neiman) ratings on Rating Watch Negative. This action reflects Fitch's expectation for higher leverage following the announcement of a definitive agreement by Ares Management LLC and Canada Pension Plan Investment Board (new sponsors) to acquire Neiman for a purchase price of $6 billion. The transaction value equates to 9.5x Neiman's LTM EBITDA of $630 million as of April 27, 2013. The current sponsors, Texas Pacific Group and Warburg Pincus, had purchased Neiman in October 2005 for $5.1 billion (or 9.7x fiscal 2005 EBITDA of $528 million). The transaction is expected to close in the fourth quarter of 2013, subject to regulatory approvals and other customary closing conditions. A portion of the purchase price will be used at the closing to repay all amounts outstanding under Neiman's existing credit facilities ($2.6 billion other than its $125 million of 7.125% senior debentures, which do not have change of control provision). No detail has been provided on the financing of the transaction. Assuming 20%-30% of equity contribution, the total transaction value (including transaction fees) could be financed with $1.2 billion-$1.85 billion of new sponsors' equity and $4.3 billion-$5 billion of debt. This compares to $2.7 billion of debt outstanding currently. Therefore, pro forma adjusted debt/LTM EBITDAR is expected to be in the 7.0x-8.0x range, versus 4.8x currently. KEY RATING DRIVERS Neiman's current Issuer Default rating (IDR) of 'B' reflects the company's continued improvement in EBITDA on strong mid-to-high single-digit top-line growth over the past three years, given the overall recovery in luxury spending. LTM EBITDA as of April 27, 2013 increased to approximately $630 million on low double-digit margins from a low of $280 million in 2009. EBITDA is still 10% below the peak level of $700 million attained in calendar 2007, while overall sales have returned close to the pre-recession run rate of $4.6 billion. Fitch expects that Neiman will continue to improve EBITDA in the low- to mid-single digits in the next 12-24 months, in line with the growth in comps and assuming relatively flat margins. This could help improve leverage ratio by 0.5x-0.7x to the low-6x to low-7x range, depending on the post-transaction capital structure. However, the impact of higher payroll taxes on domestic luxury spending, as well as a slowdown in international tourist traffic are potential risk factors that could dampen top-line and EBITDA growth. With pro forma annual interest expense of $230 million-$270 million (assuming an average cost of financing of 5.5%) and capex of $170 million-$180 million, Fitch expects Neiman to generate annual free cash flow (FCF) in the $100 million-$150 million range over the next three years. RATING SENSITIVITIES A positive rating action from the current 'B' rating is unlikely at this time given the expected increase in the pro forma leverage at the close of the transaction. Over the longer term, a positive rating action could result if Neiman's strong operating trends remain on track and leverage improves to the low 5.0x range. Post transaction, pro forma leverage is expected to be in the 7.0x-8.0x range. A negative rating action could result if, based on Fitch's projections for top line, EBITDA and FCF at closing, leverage is expected to remain above the mid-6.0x range over the next 18-24 months. Fitch has placed the following ratings for Neiman on Rating Watch Negative: Neiman Marcus, Inc. --Long-term IDR 'B'. The Neiman Marcus Group, Inc. --Long-term IDR 'B'. --Secured revolving credit facility 'BB/RR1'; --Secured term loan facility 'B/RR4'; --Secured debentures 'B/RR4'. Contact: Primary Analyst Isabel Hu, CFA Associate Director +1-212-908-0672 Fitch Ratings, Inc. One State Street Plaza New York, NY 10004 Secondary Analyst Monica Aggarwal, CFA Senior Director +1-212-908-0282 Committee Chairperson Craig Fraser Managing Director +1-212-908-0310 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: Additional information is available at ''. Applicable Criteria and Related Research: --'Corporate Rating Methodology' (Aug. 5, 2013); --'Recovery Ratings and Notching Criteria for Nonfinancial Corporate Issuers' (Nov. 13, 2012); --'Evaluating Corporate Governance' (Dec. 12, 2012). Applicable Criteria and Related Research: Evaluating Corporate Governance here Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers here Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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