Neiman Marcus buyout financing to include PIK deal
Neiman Marcus shelved plans for an initial public offering this week after a group led by private equity firms TPG and Warburg Pincus agreed to sell the iconic US company to Ares Management and Canadian Pension Plan Investment Fund for $6 billion.
Credit Suisse, Deutsche Bank and RBC have committed financing for the deal, although details of the capital structure remain vague.
The acquirers have stated that they will redeem the company's $2.56 billion in term loans in accordance with change in control provisions, and two bankers away from the deal said they expected new leveraged loans to be launched.
A small $125 million 2028 debenture is also expected to remain outstanding.
The bond part of the new capital structure will be a PIK toggle, sources said, which would give the new owners the option to pay interest in cash or allow it to accrue to the principal.
"The only reason that you would include a PIK toggle in a LBO would be if there was too much leverage, and there was a concern that the business would not generate enough cash to pay the interest," said a senior leveraged banker not on the deal.
Three bankers said this was the first time the instrument had been used for a LBO at the operating level since before the financial crisis.
During the leveraged buyout boom in 2006-2007, PIK toggles were often used to give companies with weak cash flows greater debt flexibility. In fact, Neiman started the trend, when it was bought out in 2005, it was partly financed with a PIK toggle.
Neiman was able to, and did, stop making interest payments in cash and instead doled out more debt. This option slowed the company's repayment of its original borrowing load of 6.4 times Ebitda, but helped Neiman survive the tough times.
"I have not seen the forecasts for the company's cash flows, so I don't know whether this PIK toggle is there because there is a concern that the company might not be able to service its debt, but it has certainly raised eyebrows," said a second leveraged finance banker.
"We have seen bond terms becoming more sponsor-friendly over the past couple of years, but this looks particularly aggressive."
Market speculation is that the new PIK has been underwritten. The three banks leading the financing either declined to comment or were not available.
Two bankers said that PIKs were usually done on a "best efforts" basis, in which the issuer bears the cost if the bond prints with a yield higher than expected.
Another senior banker, also away from the deal, described the financing for Neiman Marcus as a top of the market trade.
"We decided not to participate in this. It's a great asset, and no doubt it will go fine, but we don't want to be the bank that gets caught out if the market turns," said the banker.
He estimated leverage to be in the region of 7.3 times earnings.
There have been a number of PIK toggle deals issued in the last few months at the holdco level to fund dividend payments, including one this week for Ancestry.com.
That deal was upsized to $300 million from $250 million on strong investor demand, attracted by the 9.875% yield.
"It is going to be interesting to see what investors make of the Neiman PIK," said the second banker.
"Our long term view on Neiman Marcus has always hinged on the company's heavy debt load - and the proposed transaction seems to do little to offset that at this point," said CreditSights analyst James Goldstein.
"An unsecured (bond) offering would come with a relatively hefty coupon if leverage is pushed into the 6x range."
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