Neiman Marcus' Mounting Debt Woes Leave Exposed Mall Investors Antsy
As Neiman Marcus fights for its survival, investors who own debt collateralized by malls housing the luxury retailer and retail analysts find themselves on shaky ground.
Their main concerns: Does the retailer survive, or go the way of Toys R Us and Payless Shoes? And if it goes, what happens to stores located inside shopping malls that rely on the name brand as their anchor tenant?
Last week, Neiman made significant headway in attempting to extend $2.5B of debt by reaching a preliminary agreement for a three-year extension on scheduled maturity payments. Aurelius Capital Management is alleged to have pushed the department store to structure its debt in a manner that would benefit certain investors if the company fails, The Wall Street Journal reported this week.
Analysts say with or without the language, the future of Neiman — which just opened its first New York City store to anchor the new luxury mall at Hudson Yards — hinges on its ability to overhaul operations from the ground up.
The language put into the proposed agreement “may make Neiman’s potential failure more beneficial for some than it was prior to the language insertion,” Debtwire analyst Philip Emma said. "[But] it doesn’t impact the business issues that Neiman management has to address that will dictate what it can achieve operationally."
S&P credit analyst Mathew Christy told Bisnow the ratings agency will have to review the proposed debt-extension transaction when it's finalized in late April, but as of early March, his team downgraded Neiman’s credit rating to CC from triple-C, saying it believed “the proposed transactions represent a material discount to par and that a distressed exchange is a virtual certainty.”
Christy said S&P will take a closer look at any liens, collateral or real estate impacted by any type of agreement reached once the proposed debt extension is solidified.
“That’s something we would have to evaluate once the company does close on their proposed transaction, and then you finalize what the liens and the collateral package would be,” he said.
Is A Name Enough To Keep Brick-And-Mortar Open?
The Neiman Marcus brand may be strong enough for the luxury retailer to remain alive if it does file for bankruptcy, but a reorganization that leaves stores open and keeps the retailer going — recently pulled off by Mattress Firm — is no longer a given, analysts say.
“I think investors and market watchers have been somewhat stunned a little bit by some of the quality of some of the retailers that have actually gone through liquidation,” said Manus Clancy, the managing director of applied data and research at CMBS research firm Trepp Analytics.
He remembers the industry believing in the power of restructuring name brands when other marquee retailers hit the skids, only to come out the other side with stores closing left and right.
“I don’t think when Sports Authority started [restructuring] anyone would have imagined that they would not come through as just a smaller entity — maybe close 25% of their stores, but still survive ... Same thing with Toys R Us," he said. “I think people thought it’s a great brand with great locations, they're going to close 25% of their stores and come out of bankruptcy reorganized, and in both cases they liquidated."
Debtwire's Emma said it is too early to say if Neiman is somehow more safe from liquidation or some other restructuring. However, with or without a default or restructuring, the store imprint will likely shift on market concerns alone.
"If they are successful at continuing to increase the online sales, then you may see a scenario where they decided to operate fewer full-line stores," Emma said. "Likewise, if they aren’t able to achieve the financial goals of the 'Ignite to Win' plan, then there will be options that you’d expect them to consider such as closing full-line locations that do not meet return targets. However, I think it is premature to assume either will occur."
CMBS Deals Exposed To Neiman Marcus
When evaluating loans in commercial mortgage-backed securities with Neiman Marcus exposure, Trepp found 16 loans packed into 11 U.S. CMBS deals where Neiman Marcus or affiliated stores are considered a top-five tenant for the properties functioning as collateral.
Altogether, Trepp data found CMBS loans with Neiman Marcus exposure valued at $3.9B and associated with malls throughout the U.S.
Just because a mall is exposed, that does not mean it will default on its own debts or struggle without a Neiman Marcus location, Clancy said.
“To some extent I think it’s more how the loan and the property as a whole are performing,” he said. “I think [investors] are more looking at the sales-per-square foot for the mall? What is the likelihood that someone will want to come in and be there [if Neiman were to leave]?”
The investors will only be concerned if the mall backing the CMBS deal is not well-positioned to maintain its traffic or to replace Neiman Marcus with another adequate tenant, Clancy said. So far, there is no indication the exposed malls will be unable to do so.
The loans discovered by Trepp are linked to Grapevine Mills in Grapevine, Texas; Ala Moana in Honolulu; Fashion Show Mall in Las Vegas; Garden State Plaza in New Jersey; Scottsdale Fashion Square in Arizona; The Domain in Austin; Village of Merrick Park in Coral Gables, Florida; and a Starwood national mall portfolio in numerous locations.
DFW's Neiman Risk Exposure On The CMBS Side
The Grapevine Mills CMBS deals tracked by Trepp are tied to Grapevine Mills Mall in Grapevine, Texas. More than $300M in loans associated with the property were divided up and placed into three separate CMBS securitizations, Clancy said.
With this same mall featuring inline sales of $367 per SF at the time of the deals' underwriting, Grapevine Mills appears equipped to lose a major anchor tenant and refill the space without issue, Clancy said.
“In this particular case, Grapevine Mills is a really strong performer,” Clancy said. “It does really nicely in terms of debt coverage ratio and so on. So I think investors would look at this and say the owner of the property is not going to have a tough time redeveloping that parcel with a new retailer.”
As for what type of CMBS investor panics when malls lose anchor tenants? Clancy points to those lower down the CMBS food chain.
"If you are the Triple-A guy and you have a lot of credit enhancement below you , you are probably not freaking out," Clancy said. "But if you are a Triple-B minus guy— you own the Triple-B class of this deal and it's a $100M loan — all of the sudden you are starting to think, 'OK, what are the odds that it defaults? And what are the odds that the owner of the property can replace the tenant quickly?'"
What Sets Neiman Apart
While Neiman Marcus store closings would be no different on the surface than losing a JCPenney or a Macy’s, the malls carrying Neiman generally have enough cachet to remain intact with the departure of a single tenant, Clancy said.
“The one differentiator is that Neiman Marcus tends to be in more upscale locations, which in the least five years have outperformed Class-B and Class-C malls,” he said. “[There] is a much better chance you can replace a Neiman Marcus in a Class-A mall than you could replace a Macy’s in a Class-C mall for example.”
Overall, Clancy said Neiman has quite a bit in its favor when compared to other distressed retailers.
"If I were to bet, I would say Neiman Marcus probably survives because of the strength of the name, but again, we have been taken by surprise in the past," he said.
Emma with Debtwire agrees that Neiman's marquee brand name in the luxury segment makes it a different player.
"I’ve learned to never say never with retail, because things do change and online has enabled brands to come in and grow exponentially in a relatively short period of time," Emma said. "It’s hard to envision the Neiman Marcus brand not having a place in the market. That doesn’t mean in several years it operates as it does now in all the markets it does now. But, there is a place for it."