It was supposed to be just what Saks needed to turn things around. By taking over struggling rival Neiman Marcus, the pitch went, the iconic retailer would become a luxury powerhouse — one with enough bargaining and pricing power to cut costs and boost profitability.
So when the company turned to the bond market to finance the takeover last December, investors were drawn in. Sure, there was some skepticism, but a juicy 11 percent interest rate, pledges on some of its assets and big-time backers including Amazon.com Inc. and Salesforce Inc. assuaged their concerns. They shelled out $2.2 billion, $200 million more than Saks originally sought.
Just five months later, the debt is on the verge of collapse. Saks is seeking more money to shore up its finances, bondholders are nursing almost $1 billion in losses and some have even begun to wonder if they’ll receive a single interest payment.
The selloff is being turbocharged in part by creditor fears that they could soon be stripped of their collateral or pushed down the repayment priority line as part of any new cash raise, a bare-knuckled tactic known as priming that’s become commonplace on Wall Street in recent years. Saks’ decision earlier this week to hire Kirkland & Ellis and PJT Partners — two firms well versed in such maneuvres — to assess its options only exacerbated those concerns, market watchers say. All of this is coming at a time of turmoil in the retail industry as companies confront higher import costs and a weaker outlook for consumer spending due to President Donald Trump’s tariffs.
“A number of retailers have been caught flat-footed with the recent tariff turmoil and have been seeking improved liquidity cushions to ride out the uncertainty,” said John Dixon of Dinosaur Financial Group. He said that Saks’ bondholders “would almost certainly lose value” if the company managed to cobble together a sizeable new financing arrangement.
Representatives for Saks and Kirkland & Ellis didn’t respond to requests seeking comment, while PJT declined to comment.
Saks’ bonds have been under pressure from almost the day they were sold. Its longstanding struggles to pay suppliers and maintain inventory continued to weigh on it after the acquisition, and in February the company told vendors it would take more than a year to settle unpaid bills.
In early April, as Trump was rolling out a fresh wave of tariffs on US trading partners, investors responded by dumping Saks’ bonds, pushing them below 80 cents on the dollar. The retail sector is widely considered among the most vulnerable to Trump’s trade agenda, which threatens to shrink profit margins and potentially upend supply chains.
Volatility in financial markets due to the tariffs and economic uncertainty could also weigh on spending among high-end shoppers, according to Fitch Ratings analyst David Silverman. Combined with layoffs in high-paying sectors, that could dent demand for luxury goods.
Soon after, Saks said the economic uncertainty caused by Trump’s tariffs were enough to potentially warrant raising more debt, likely via a so-called first-in, last-out loan under the $1.8 billion borrowing capacity of its existing revolving credit facility. That prompted its bonds to fall even further, trading down to around 56 cents on the dollar.
Late last month management held a conference call with investors to update wary money managers. It did little to calm their nerves of rattled investors, some industry insiders said.
The company said it had between $360 million and $400 million of liquidity, compared to almost $900 million projected to have been available at the close of the Neiman Marcus acquisition. Management also said it was mulling ways to monetise some of its real estate assets to shore up its finances.
S&P Global Ratings, which rates the bonds B, or five levels below investment-grade, said in a report Tuesday that there’s at least a 50 percent chance it will lower Saks’ credit grade by up to two levels in the next few months.
Saks is likely to post a free operating cash flow deficit this year and next, which could hinder its ability to sustain inventory flow, including during the key holiday season, analyst Frederico Carvalho wrote.
Exploring Options
With the business outlook in flux, market watchers are increasingly looking at the assets securing the bonds to assess their value.
Some speculate they might not be worth as much as once thought. Any struggles or new financing could potentially dent the value of claims tied to Saks’ flagship Fifth Avenue store. While bondholders don’t have a direct claim to the asset, they do have an equity pledge, according to deal documents.
What’s more, some investors may have bought the bonds without fully realising the mutability of certain protections, said Covenant Review’s Ross Hallock, who examined a preliminary version of the offering documents in a report dated May 5.
“They are supposed to be disclosing everything — and yes, they’ve disclosed everything — but the memorandum is 438 pages long,” Hallock said. “It’s like reading War and Peace.”
By Eliza Ronalds-Hannon
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Saks Hires Kirkland & Ellis, PJT to Explore Financing Options
The advisers will help Saks Global assess its options for boosting liquidity as economic pressures impact the US retail sector.
