Dive Brief:

• S&P Global downgraded Neiman Marcus’ credit rating deeper into junk territory, to CCC-, on Tuesday, according to an emailed press release.
• The ratings agency took a negative outlook on the department store, indicating the heightened possibility of a debt restructuring, either through a bankruptcy or deal with lenders. A restructuring could take place within the next six months, according to S&P.
• The luxury department store chain has reportedly been exploring a possible bankruptcy filing to get some debt relief. Reuters reported earlier this month that Neiman was in talks with bondholders about financing to fund it through a Chapter 11 process.

Dive Insight:

Neiman Marcus has sagged under a large debt load for years now after multiple leveraged buyouts by private equity firms. Even in good times, when the company’s sales were on the uptick, it posted losses as it paid off its interest obligations.

Now, with a pandemic gripping the country and disrupting retail, Neiman’s stores are closed and its financial performance for the year uncertain. 

S&P analysts Mathew Christy and Helena Song noted that Neiman is “contending with the disruption and recessionary conditions stemming from the coronavirus pandemic, the challenging trends facing department stores, and an unsustainable capital structure.”

The analysts added that with Neiman’s leverage levels, the retailer “depends on favorable market conditions and strong execution to sustain its capital structure.” But with the spread of COVID-19 and the efforts to slow it, market conditions are anything but favorable. Analysts and economists across the board expect a recession, possibly a severe one. 

The pandemic and recession mean “the company’s prospects for a turnaround are increasingly low,” S&P analysts said. Meaning a restructuring could be necessary to keep Neiman afloat. 

Last year, the company worked out a deal to extend some loan maturities, but the transaction didn’t relieve it of the debt load on its balance sheet. 

Neiman’s relationship with some lenders has also become contentious at times. It has faced multiple lawsuits over the corporate transfer of Neiman’s luxury e-commerce unit, MyTheresa. The retailer has denied allegations that its private equity sponsor, Ares Management, took MyTheresa out from under the Neiman corporate umbrella in an effort to “tighten its stranglehold over the Company’s creditors.”