An investor group consisting of Mudrick Capital Management LP and Third Point LLC has announced its plans to challenge the $600 million financing package that Neiman Marcus Group has secured for its upcoming bankruptcy filing. The group’s main objective is to push for the sale of the struggling US department store operator. At this stage, the timing and location of the bankruptcy filing have not been finalized, as stated by sources close to the matter.

Neiman Marcus has been significantly burdened by debt, and the COVID-19 pandemic has dealt a severe blow to its sales, with store closures being a major factor. In response to the financial challenges, Mudrick, along with the hedge fund Fir Tree Partners, has submitted a $700 million proposal for debtor-in-possession financing. However, Neiman Marcus intends to proceed with the $600 million loan it has negotiated with creditors, including Pacific Investment Management Co, Davidson Kempner Capital Management LP, and TPG’s Sixth Street Partners.

Ultimately, the bankruptcy judge will have the final say on the company’s financing. The investor group behind the rival loan plans to challenge it in court, arguing that their offer is more cost-effective. The proposed loan stipulates that Neiman Marcus should seek a sale while under bankruptcy protection before attempting to reorganize its finances. The investor group considers Hudson’s Bay Co, the owner of Saks Fifth Avenue, as a suitable buyer, although it remains uncertain if Hudson’s Bay is currently in a position to pursue a takeover. If a viable bidder does not emerge, the proposed loan terms call for Neiman Marcus to restructure its debts and emerge from bankruptcy in a more streamlined form.

This competition among lenders highlights the attractiveness of debtor-in-possession loans, which offer high interest rates, repayment priority, and strict terms. The lenders providing the $600 million financing package already hold most of the company’s senior debt, making it challenging for the new investors to convince Neiman Marcus to accept their competing loan. Nevertheless, the rival proposal may exert pressure on the existing bankruptcy lenders to revise some terms.

Neiman Marcus’s significant debt can be traced back to its $6 billion leveraged buyout in 2013 by Ares Management Corp and Canada Pension Plan Investment Board. Similar to other traditional department stores, Neiman Marcus has faced difficulties in competing with discount retailers and the rise of online shopping. The company furloughed the majority of its employees in March, and other department store operators, such as J.C. Penney and Nordstrom, are grappling with financial challenges of their own due to store closures. J.C. Penney is currently contemplating filing for bankruptcy to address its unsustainable finances.

Useful links:
1. Neiman Marcus Group faces investor challenge over $600 million financing package
2. Investor Group Said to Oppose Neiman Marcus’s $600 Million Loan