Neiman Marcus Group LTD LLC – Court Authorizes $275mn of Interim DIP Financing, Brushes Aside Charges of “Highway Robbery” from Spurned DIP Lender Mudrick Capital in Respect of Fees

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May 8, 2020 – The Court hearing the Neiman Marcus Group cases issued an order authorizing the Debtors to (i) access $275.0mn of debtor-in-possession (“DIP”) financing on interim basis and (ii) use cash collateral [Docket No. 254].

The $275.0mn is part of a $675.0mn DIP package requested by the Debtors the day before (May 7, 2020) and is to be made available in three tranches: (1) $275.0mn upon issuance of this interim DIP order, (ii) $250.0mn upon the issuance of a final DIP order and (iii) $150.0mn 120 days after the Petition date. The DIP financing does not include a roll-up and does not “prime any creditors without their consent.”

The expensive DIP financing (see detail as to interest rates and fees totaling more than 20% below) was approved notwithstanding a vigorous objection from Mudrick Capital Management LP ("Mudrick," holder of approximately $144.0mn of the Debtors' term loans) which called an estimated $73.0mn in fees "highway robbery" [Docket No. 179, see further below] and argued further that those fees were being paid in respect of a contrived backstop for the Debtors' DIP and exit financing. A backstop not needed at all as evidenced by their own DIP financing offer (which had "facially superior economics and no Backstop whatsoever"). The Mudrick objection, coming quickly on the heels of its spurned DIP financing offer and from a major creditor which has been a vocal opponent of the Debtors' reorganization plans, provides something of a harbinger of further objections/obstacles for the Debtors in the weeks ahead.

Prior to the Debtors' chapter 11 filing, Mudrick and hedge fund Third Point LLC reportedly offering $700.0mn of DIP financing on the condition that the Debtors embark on an immediate sale process; an offer and approach which the Debtors rejected. The Debtors' DIP motion stated that the Mudrick financing: "lacked the support of a majority lenders under the Term Loan Facility, was not fully committed, and therefore did not provide the same certainty and stability as the Term Loan Lender Group’s proposal…was not actionable because, among other things, the proposal required a protracted, costly, and difficult priming fight at the outset of these chapter 11 cases with little chance at success."

The DIP motion continued, “Several weeks of negotiations culminated in a comprehensive, pre-negotiated restructuring transaction embodied in the Restructuring Support Agreement with, among other parties, an ad hoc group of lenders who collectively hold approximately 78 percent of the Debtors’ term loan debt and 78 percent of the Debtors’ debentures (the ‘Term Loan Lender Group’) and an ad hoc group of holders of approximately 99 percent of the Debtors’ Second Lien Notes and approximately 70 percent of Debtors’ Third Lien Notes (the ‘Noteholder Group’). The Restructuring Support Agreement provides commitments from the Term Loan Lender Group (excluding the holders of the 2028 Debentures) and the Noteholder Group to backstop the proposed $675 million new-money debtor in possession financing facility (the ‘DIP Facility’), provide a $750 million exit financing facility (the ‘Exit Facility’), and support implementation of a chapter 11 plan that substantially deleverages the Debtors’ balance sheet and allows the Debtors to emerge from these chapter 11 cases as a stronger, better-capitalized enterprise positioned for sustained success. Importantly, the DIP Lenders have agreed to provide the Prepetition Term Loan Lenders, the holders of the Second Lien Notes, the holders of the 2028 Debentures, and the holders of the Third Lien Notes with an opportunity to participate in the DIP Facility and Exit Facility if they sign the Restructuring Support Agreement.

If approved, the Debtors will use the proceeds of the DIP Facility to, among other things, honor employee wages and benefits, procure goods and services, fund general and corporate operating needs and the administration of these chapter 11 cases, provide adequate protection to the Debtors’ prepetition lenders, and consummate their plan of reorganization, all in accordance with the initial DIP budget…The terms of the DIP Facility are appropriate and reasonable under the circumstances, were the product of good faith, arm’s-length negotiations, and will benefit all stakeholders in these chapter 11 cases. Moreover, in contrast to many retail cases and other cases with asset-based lending facilities, the Debtors are not seeking to ‘roll-up’ the prepetition loan facilities under the DIP Facility, nor do the Debtors seek to prime any creditors without their consent. In addition, the Debtors do not seek to place any liens on inventory subject to a proper consignment.

Further, no other third party came forward with an actionable post-petition financing proposal. The Debtors received an initial draft of a term sheet from another group of Term Loan Facility lenders, but this term sheet lacked the support of a majority lenders under the Term Loan Facility, was not fully committed, and therefore did not provide the same certainty and stability as the Term Loan Lender Group’s proposal. Nonetheless, the Debtors engaged in good-faith discussions with the potential alternative lender but were unable to make significant progress in such discussions. Ultimately, the Debtors determined that the alternative financing proposal was not actionable because, among other things, the proposal required a protracted, costly, and difficult priming fight at the outset of these chapter 11 cases with little chance at success when the Debtors should be focused on stabilizing their operations and building further consensus around the value-maximizing transaction presented as of the Petition Date, of which the proposed DIP is a key component. Thus, the Debtors believe that the DIP Facility is the only acceptable post-petition financing proposal.”

Key Terms of the DIP Facility

  • Borrowers: Neiman Marcus Group Ltd LLC, as Lead Borrower, and the Neiman Marcus Group LLC and the NMG Subsidiary LLC, as Borrowers.
  • Guarantors: Mariposa Intermediate Holdings LLC, and each Subsidiary (other than any Excluded Subsidiary) and certain direct or indirect parent of the Lead Borrower (collectively with the Borrowers, the “Loan Parties”).
  • DIP Lenders: Those DIP Lenders listed on Schedule 2.01 attached to the DIP Credit Agreement.
  • DIP Agent: Cortland Products Corp.
  • DIP Commitments: An aggregate principal amount of $675mn, of which (a) $275mn shall be available to the Borrowers upon entry of the Interim Order; (b) $250mn shall be available to the Borrowers upon entry of the Final Order; and (c) $150mn shall be available to the Borrowers after the 120th day after the Petition Date.
  • Maturity: The maturity date means, the date that is the earliest of:
  1. October 7, 2020, or, if such date has been extended pursuant to section 2.18 of the DIP Credit Agreement, December 7, 2020;
  2. the date of the substantial consummation (as defined in Section 1101(2) of the Bankruptcy Code) of an Acceptable Plan;
  3. the date the Bankruptcy Court converts any of the Chapter 11 Cases to a Chapter 7 case;
  4. the date the Bankruptcy Court dismisses any of the Chapter 11 Cases;
  5. the date on which the Loan Parties consummate a sale of all or substantially all of the assets of the Loan Parties pursuant to section 363 of the Bankruptcy Code or otherwise; or
  6. such earlier date on which the Term Loans shall become due and payable by acceleration or otherwise in accordance with the terms of the DIP Credit Agreement and the other Loan Documents.
  • Interest Rates: (i)The Term Loans comprising each ABR Borrowing will bear interest at the ABR plus the Applicable Margin (11.75%) and (ii) The Term Loans comprising each Eurocurrency Borrowing will bear interest at the Adjusted LIBO Rate for the Interest Period in effect for such Borrowing plus the Applicable Margin (12.75%).
  • Default Rate: An additional 2%
  • Fees:
    • Total Upfront Fee: 4% of Total Commitments
    • Total Exit Fee: 3% of Total Commitments
    • Extension Fee: 2% of Total Commitments
    • Ticking Fee: daily basis at a rate per annum equal to 6.375% on the daily unused Commitment
  • Roll-Up: None
  • Milestones:
    • Interim DIP Order: Petition Date (“PD”) plus 3 business days 
    • Filing of Acceptable Plan: PD plus 30 days
    • Final DIP Financing Order: PD plus 40 days 
    • Approval of Disclosure Statement: PD plus 75 days
    • Plan Confirmation Order: PD plus 120 days
    • Effectiveness Date: PD plus 120 days

The Mudrick Objection

The objection stated, “The proposed Backstop Agreement, at its core, is no more than an attempt by the majority term loan lenders under the Credit Agreement (the ‘Backstop Lenders’) to extract more than $73 million in estate value from the Debtors at the expense of Mudrick and the other minority term loan lenders, all while flouting the legal principles fundamental to any restructuring proceeding. It purports to provide substantial consideration to a carefully curated group of lenders so as to ensure that the DIP Loan is fully subscribed, and that all necessary funding will be available to the Debtors at the outset of their bankruptcy cases (the ‘Backstop’). It also purports to provide additional consideration for exit financing. But the magnitude of the fee due to the Backstop Lenders, when compared to the actual commitment risk for which that fee purport to provide compensation (which is no risk at all), smacks of impropriety, and is a quintessential example of a lack of good faith. Perhaps even more troubling, because those Backstop fees are structured as grants of reorganized equity based on a deep discount to a currently unknown plan equity value, such equity based fees could ultimately be measures greater than their cash equivalent.

The Motion should be denied because:

  • No Backstop at all is warranted where, as here, numerous parties are competing for the opportunity to commit capital and there is virtually zero risk of undersubscription.
  • Even if some Backstop were warranted for the extremely modest 11% of the DIP Loan that is not currently committed (an amount equal to approximately $77 million), the Backstop Lenders are effectively seeking fees of over $62 million on that $77 million, which is over 81% of the backstopped amount.
  • Mudrick itself formally offered almost a week ago to provide any necessary Backstop on the same terms as the Backstop Lenders but for half of any fee they propose—and, tellingly, the Debtors have ignored this offer, putting the lie to any claim that the Backstop fee is tied to subscription risk (rather than veiled payments to secure the consent of the holders of a majority of the Term Loans).
  • The Debtors’ exit financing of $750 million, which purports to recapitalize the $675 million DIP Loan with a minimal $75 million capital increase (the ‘Exit Financing’), is a transparent attempt by the Backstop Lenders to grab an extra 1.5% in backstop fees, or over $11 million, on the back-end — which amounts to a 15% fee on the $75 million in increased capital.
  • The Backstop also not only runs afoul of Mudrick’s rights under the Credit Agreement governing the Term Loans, but it clearly is part and parcel of the Debtors’ anticipated plan, which cannot possibly be approved if the Backstop is approved, including because it constitutes impermissible vote buying and a preferential payment of substantial estate value to some creditors and not to other similarly situated creditors.

The Debtors readily admit that the only true justification for the extraordinary fees is that the ‘[Backstop Lenders] expressly required [the Backstop fees] as an integral component of the financing package.’ But highway robbery is no justification as to the reasonableness of the Backstop, much less a justification as to why any Backstop is necessary at all.

Indeed, simple math shows that a Backstop here is wholly unnecessary, and its inclusion underscores the impropriety of what the Debtors and the three Backstop Lenders propose. The three Backstop Lenders have included as Backstop parties (1) 78% of the holders of the Term Loans, (2) 99% of the Second Lien Noteholders, (3) 70% of the Third Lien Lenders (the ‘Backstop Parties’) — all of whom have committed to fund their pro rata share of the DIP Loan. But that is not the end of the commitments that are already lined up. The lending syndicate for the Term Loans comprises a mere handful of Senior Secured Lenders: the Backstop Parties account for approximately 78% of the Term Loans, and Mudrick and a similarly situated minority Senior Secured Lender together account for approximately 13% of the Term Loans, leaving only 9% of the holders of the Term Loans unaccounted for.

In sum, no backstop at all is warranted as to either the DIP Loan or the Exit Financing. Even if such backstop were necessary, the market does not support the level of backstop fees proposed. The best of evidence of this is the competing DIP that Mudrick and others have proposed to the Debtors (the ‘Mudrick DIP’), which contains facially superior economics and no Backstop whatsoever. In contrast to the Debtors’ proposed DIP Loan, the Mudrick DIP provides for additional borrowing capacity, contains no backstop fees (instead it is issued at 5% OID—much lower than the 9.2% Backstop fee), and is provided at a lower interest rate. A copy of the term sheet outlining the Mudrick DIP is attached as Exhibit A.

Accordingly, the Backstop Agreement is no more than a transparent attempt to raid estate property — property that should be distributed to all Senior Secured Lenders on a pro rata basis, as the Credit Agreement, and the Bankruptcy Code, requires. The law and equity demand that this Court deny approval of the Backstop Agreement and any DIP Loan that is premised on the Backstop Agreement.”

Prepetition Capital Structure

As of the Petition date, the Debtors’ had outstanding funded-debt obligations in the aggregate principal amount of approximately $5.1bn, including:

  1. a $900.0mn senior secured asset-based revolving credit facility (the “Asset-Based Revolving Credit Facility”), of which $749.0mn has been drawn; 
  2. a $100.0mn last-out term loan facility (the “FILO Facility”); 
  3. a $2,253.1mn senior secured term loan facility (the “Term Loan Facility”), which is comprised of $12.6mn outstanding of stub term loans with the original maturity date of October 25, 2020, $1,193.8mn outstanding of term loans with an extended maturity date of October 25, 2023, which pay interest entirely in cash, and $1,046.7mn outstanding of term loans with an extended maturity date of October 25, 2023, which pay interest partially in cash and partially in kind; 
  4. $561.7mn aggregate principal amount of 14.000% Second Lien Notes due 2024 (the “Second Lien Notes”); 
  5. $730.5mn aggregate principal amount of 8.000% Senior Secured Third Lien Notes due 2024 (the “8.000% Third Lien Notes”); 
  6. $497.8mn aggregate principal amount of 8.750% Senior Secured Third Lien Notes due 2024 (the “8.750% Third Lien Notes” and, together with the 8.000% Third Lien Notes, the “Third Lien Notes”); 
  7. $80.7mn aggregate principal amount of 8.000% Senior Cash Pay Notes due 2021 (the “Unsecured Cash Pay Notes”); 
  8. $56.6mn aggregate principal amount of 8.750%/9.500% Senior PIK Toggle Notes due 2021 (the “Unsecured PIK Toggle Notes” and, together with the Unsecured Cash Pay Notes, the “Unsecured Notes”); and 
  9. $125.0mn aggregate principal amount of 7.125% Senior Debentures due 2028.

Funded Debt

Maturity Date

Interest Rate

Principal Amount Outstanding (in thousands)

Asset-Based Revolving Credit Facility

July 25, 2021



FILO Facility

July 25, 2021



Cash Pay Extended Term Loans

October 25, 2023



Cash Pay/PIK Extended Term Loans

October 25, 2023



2013 Term Loans

October 25, 2020



14.0% Second Lien Notes

April 25, 2024

8.0% cash / 6.0% PIK


8.000% Third Lien Notes

October 25, 2024



8.750% Third Lien Notes

October 25, 2024



8.000% Cash Pay Notes

October 15, 2021



8.750%/9.500% Senior PIK Toggle Notes

October 15, 2021



7.125% Senior Debentures

June 1, 2028







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