Neiman Marcus Change of Controls and Possible Acquisition Structures. March 17, 2017

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1 Neiman Marcus Change of Controls and Possible Acquisition Structures March 17,

2 Background on Neiman Marcus Neiman Marcus was acquired by Ares Management, L.P. and Canada Pension Plan Investment Board (the Sponsors ) in October 2013 The company has over $4 billion of outstanding debt and has recently hired financial advisors to explore strategic alternatives including a sale of the company or other assets The Wall Street Journal reported on March 14, 2017, that Hudson s Bay Co. is seeking a deal to control Neiman Marcus without assuming the company s debt 2

3 Neiman Marcus Outstanding Debt Company s debt includes: 1st Lien Debentures (the 2028 Notes ) ABL and Term Loan (the Bank Debt ) Cash Pay Notes and PIK Toggle Notes (the 2021 Notes ) 3

4 Neiman Marcus Structure 4

5 Acquisition Structuring Concerns Neiman s debt continues to trade at substantial discounts to par if an acquisition triggered Change of Control provisions, it could result in the acquisition being economically impractical While an acquirer could potentially purchase minority interests or make co-investments with the Sponsors in Neiman Marcus, a strategic purchaser would likely seek majority control to ensure that it is able to realize synergies with the target Given Neiman Marcus outstanding debt, a potential purchaser may seek to structure a transaction where only the Neiman entities are responsible for such debt 5

6 Change of Control Provisions Changes of ownership or management may fundamentally change a company s business Creditors seek to mitigate potential risks from such changes by including change of control provisions in indentures and credit agreements In high yield bonds, a change of control often grants bondholders a put option allowing them to sell their bonds back to the issuer at 101% 6

7 Change of Control - Bank Debt A Change in Control under the Term Loan and ABL constitutes an Event of Default and is defined to occur if: (1) at any time, (a) Holdings ceases to Beneficially Own, directly or indirectly, 100% of the issued and outstanding Equity Interests of the [Company]; provided, however, that prior to the completion of the Closing Date Conversions, a controlled Affiliate of the Sponsors may own the Class B Capital Stock of the [Company]; or (b) a change of control (or comparable event) occurs under the [Term Loan/ABL] or the Senior Notes Indentures or the documentation governing any Permitted Refinancing Indebtedness in respect of any of the foregoing, in each case, if any Indebtedness is outstanding under such agreement; or (2) at any time prior to the consummation of a Qualified IPO, the Permitted Holders, taken together, cease to Beneficially Own, directly or indirectly, Voting Stock representing 50% or more of the aggregate ordinary voting power represented by the issued and outstanding Equity Interests of Holdings (determined on a fully diluted basis but without giving effect to contingent voting rights not yet vested); or (3) at any time after the consummation of a Qualified IPO, any person or "group" (within the meaning of Rules 13d-3 and 13d-5 under the Exchange Act, but excluding any employee benefit plan of such Person and its subsidiaries and any Person or entity acting in its capacity as trustee, agent or other fiduciary or administrator of any such plan), other than the Permitted Holders, acquires Beneficial Ownership of Voting Stock of a Parent Entity representing (a) more than 35% of the aggregate ordinary voting power for the election of directors represented by the issued and outstanding Equity Interests of such Parent Entity (determined on a fully diluted basis but without giving effect to contingent voting rights that have not yet vested) and (b) more than the percentage of the aggregate ordinary voting power for the election of directors that is at the time Beneficially Owned, directly or indirectly, by the Permitted Holders, taken together (determined on a fully diluted basis but without giving effect to contingent voting rights that have not yet vested) (emphasis added) 7

8 Change of Control - Bank Debt Under clause (2), a Change in Control occurs if the Permitted Holders cease to Beneficially Own, directly or indirectly, Voting Stock representing 50% or more of the voting power of Holdings equity Permitted Holders is defined to include the Sponsors, certain management entities and any Permitted Parent Permitted Parent is generally limited to any of the Company s direct or indirect parents that are controlled by Permitted Holders The Bank Debt defines Permitted Holders in a fairly limited manner to effectively ensure that the Sponsors retain control over the Company 8

9 Change of Control Notes A Change of Control triggers a put right at 101 under the 2021 Notes (both the Cash Pay and PIK Toggle notes) and is defined to be the occurrence of any of the following events: (1) any person or "group" (within the meaning of Rules 13d-3 and 13d-5 under the Exchange Act, but excluding any employee benefit plan and any person or entity acting in its capacity as trustee, agent or other fiduciary or administrator of any such plan), other than one or more of the Permitted Holders, acquires Beneficial Ownership of Voting Stock of the [Company] representing more than 50% of the aggregate ordinary voting power for the election of directors of the [Company] (determined on a fully diluted basis but without giving effect to contingent voting rights that have not yet vested); or (2) the sale, lease or transfer, in one or a series of related transactions, of all or substantially all the assets of the [Company] and its Restricted Subsidiaries, taken as a whole, to any Person other than one or more of the Permitted Holders (emphasis added) 9

10 Change of Control Notes A Change of Control will likely occur if any person or group acquires Beneficial Ownership of Voting Stock of the Company representing more than 50% of voting power Again, there is an exception for Beneficial Ownership by Permitted Holders 10

11 Change of Control Notes Permitted Holder under the 2021 Notes is defined to include a Permitted Parent, which, in turn, is defined to include: any Public Company (or Wholly Owned Subsidiary of such Public Company), if and for so long as no person or group (within the meaning of Rules 13d-3 and 13d-5 under the Exchange Act ), other than a Permitted Holder, has Beneficial Ownership of Voting Stock of such Public Company representing more than 50% of the aggregate ordinary voting power for the election of directors represented by the issued and outstanding Equity Interests of such Public Company 11

12 Change of Control Notes This Public Company exception would likely allow a Public Company to purchase the Company without triggering a Change of Control (provided that the Public Company has no majority shareholders) Public Company is defined to be any Person with a class or series of Voting Stock that is traded on a stock exchange or in the over-the-counter market The 2021 Notes would likely allow a Public Company to purchase Neiman Marcus without triggering the Change of Control put 12

13 Change of Control Conclusions Bank Debt - Sale of majority ownership in the company is likely to trigger an Event of Default under relatively restrictive Change of Control provisions 2028 Notes - No Change of Control provisions 2021 Notes - Change of Control provisions may permit a Public Company to acquire the Company 13

14 Potential Acquisition Structures? Subject to any restrictions in the acquirer s debt, a Public Company could potentially acquire the Company with the 2021 Notes and 2028 Notes remaining at the Neiman Marcus entities Change of Control provisions in the Bank Debt would likely continue to pose an obstacle though Bank Debt lenders may be receptive to an amendment permitting the transaction 14

15 Potential Acquisition Structures? Neiman has recently contributed assets to certain Unrestricted Subsidiaries The company could conduct a deleveraging transaction where debt issued by Unrestricted Subsidiaries (and potentially equity as well) is offered in exchange for a portion of the 2021 Notes Bank Lenders may be more receptive to an amendment if it is contingent on the successful consummation of a deleveraging exchange 15

16 Where Does That Leave Us? A broad carve-out for ownership by a Public Company in the 2021 Notes likely creates a potential loophole allowing a Public Company to purchase Neiman Marcus without triggering certain Change of Control puts While amendments to the Bank Debt are still likely necessary, lenders may be more amenable to such amendments if they are contingent on a deleveraging exchange 16

17 For More Information... Reorg Covenants provides analytic research, commentary and web-based technology to keep you apprised of the risks and opportunities for the companies and credits you invest in and advise on. Subscribers can access our full coverage of Neiman Marcus here. To gain access to Reorg Covenants, request a trial here or us at questions@reorg-research.com. 17