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What could be more relatable than a holiday spending blunder? Last December, US department store chain Saks acquired rival Neiman Marcus for $2.7bn. To help fund the deal, it issued $2.2bn in bonds. And already, the combined business has found itself struggling to meet a $120mn interest payment due on Monday.
Saks has responded in a no less relatable way: by going deeper into debt. Late on Friday it announced a complex $600mn fundraising that provides some breathing room. But the US retail sector is floundering, and in trying to dig itself out of a hole, Saks has made some of its creditors very unhappy.
Typically when a company borrows money, investors who provide the same class of capital — say, participating in a given bond issue — get equal treatment. Saks, though, has opted to divide and conquer. A slim majority of bondholders agreed to put up much of the new money. But in return they get to hold the company’s most senior-ranked debt, meaning they gets top treatment in any bankruptcy. Some of this investor group’s existing bonds will be converted into the new type too.
Not so for the minority, who are largely left with their existing bonds pushed further down the pecking order. This kind of unequal treatment has a name in debt restructuring circles: “creditor-on-creditor violence”.
Saks presumably bets the bruised feelings will be worth it in the end. The deal is certainly helpful to Richard Baker, Saks’ billionaire owner, since restructuring avoids a bankruptcy in which his equity could prove worthless. Baker is already busy: he also owns Hudson’s Bay, a Canadian department store retailer in the middle of bankruptcy proceedings.
The lossmaking Saks thinks it could, with cost cuts and various accounting adjustments, make $1bn of ebitda in 2026. That suggests a company worth just under $6bn, valued on the same multiple at which luxury rival Nordstrom was recently acquired. But with more than $5bn of group debt, even in this rosy scenario the equity looks to have little value.
Retail is particularly prone to kick the can exercises where companies use their intellectual property, real estate and inventory as security to raise capital when in dire straits. And still, lenders to the sector get burned. An analysis from Fitch Ratings found that 34 of 79 recent retail bankruptcies ended in liquidations instead of reorganisations, four times the rate across all sectors.
Saks can pit creditors against one another partly because its bonds came with fairly loose conditions, as often happens when financing is raised during periods of market complacency. That incentivises borrowers to try various stunts in order to avoid bankruptcy. But as with any credit-fuelled holiday splurge, the bill eventually comes due. Saks has six months until its next interest payment. A less-than-merry Christmas looms.
sujeet.indap@ft.com
