Fitch Downgrades Neiman’s Term Loan/Secured Notes
Fitch Ratings said it has downgraded the rating on the Neiman Marcus Group’s (NMG) senior secured term loan and 7.125% secured debentures to B/RR4 from B+/RR3, given more secured debt in the capital structure.
NMG is issuing a $500 million senior secured incremental term loan due 2018, and plans to use the proceeds to repay its senior subordinated notes due October 2015. Fitch said the rating on the 10.375% senior subordinated notes is withdrawn.
Fitch has also affirmed its ratings on Neiman Marcus, including the Issuer Default Rating (IDR) on Neiman Marcus and its subsidiary, The Neiman Marcus Group at B. The Rating Outlook has been revised to Positive from Stable. NMG had $2.86 billion of debt outstanding as of October 27, 2012.
The ratings reflect NMG’s continued improvement in EBITDA on strong mid-to-high single-digit top-line growth over the past two years. The company ended its fiscal year 2012 (ending July 2012) with adjusted debt/EBITDAR at 5.1x on comparable store sales (comps) growth of 7.9% and EBITDA of $592 million.
The revision to Positive Outlook reflects Fitch’s expectation that Neiman Marcus will continue to improve EBITDA above the $600 million level in fiscal 2013 if comps are sustained in the mid-single-digit range. This would take leverage to the high 4.0x range over the next 12-24 months.
However, the overhang of the fiscal cliff with expected higher taxation on wealthy consumers as well as a slowdown in international tourist traffic could potentially dampen top-line growth to the low single-digit range over the next two years. In addition, the current quarter is expected to be affected by the disruptions from Hurricane Sandy, which could hurt both top-line and gross margins.
The refinancing of the $500 million of subordinated notes due in October 2015 should help push the maturities further off, with the next maturity being the ABL revolver due May 2016. Given the first-lien security package and NMG’s strong liquidity and FCF profile, Fitch expects the company will be able to refinance this maturity.
Liquidity and Refinancing Risk: Reflecting the $449 million dividend payment made in March 2012 to its fiscal sponsors, the company had approximately $69 million in cash on hand and $455 million of availability under its $700 million asset-based revolving credit facility (ABL revolver) as of Oct. 27, 2012. Fitch expects NMG to generate annual free cash flow (FCF) in the $100 million-$150 million range over the next couple of years, even with capital expenditures at the $170 million-$180 million level.