Fitch Ratings has affirmed its ratings on Neiman Marcus, including the Issuer Default Rating (IDR) on Neiman Marcus, Inc. and its subsidiary, The Neiman Marcus Group, Inc., at 'B'. The Rating Outlook has been revised to Positive from Stable. NMG had $2.86 billion of debt outstanding as of Oct. 27, 2012. A full rating list is shown below.
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 rating agency also has downgraded the rating on the Neiman Marcus Group, Inc.'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. The rating on the 10.375% senior subordinated notes is withdrawn.
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.
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.
The ratings of the various classes of debt listed below reflect their respective recovery prospects. Fitch's recovery analysis assumes an enterprise value (EV) of $1.8 billion in a distressed scenario. This is based on a distressed EBITDA of $300 million and market valuation of 6.0x EV/EBITDA.
Applying this value across the capital structure results in outstanding recovery prospects (91%-100%) for the revolving credit facility, which is rated three notches above the IDR at 'BB/RR1'. The $700 million credit facility maturing in May 2016 is secured by a first lien on inventory and cash of NMG and the subsidiary guarantors and a second lien on real estate, capital stock and all other tangible and intangible assets, including a significant portion of NMG's owned and leased real property (which currently consists of approximately half of NMG's full-line retail stores) and equipment.