Unlock Editor’s Digest Lock for Free
FT editor Roula Khalaf will select your favorite stories in this weekly newsletter.
What’s more approachable than a breakdown in holiday spending? Last December, US department store chain Sachs acquired rival Neeman Marcus for $2.7 billion. It issued $2.2 billion in bonds to fund the transaction. And already, the total business has found themselves struggling to meet the $102 million interest scheduled for Monday.
Saks responded in a relevant way by deepening his debt. Late Friday, it announced a complex $600 million funding that would provide several breathing rooms. However, the US retail sector fluttered, and in trying to dig its own out of the hole, Sachs made some of its creditors extremely unhappy.
Usually, when a company borrows money, investors who provide the same class of capital – for example, participating in a particular bond issue – are treated equally. However, the Saxe chose to split and conquer. The majority of bondholders agreed to build up much of the new money. But in return, they can hold the company’s most senior debt. In other words, you are receiving the best treatment in bankruptcy. Some of the existing bonds in this investor group will also be converted to new types.
That’s not the case for the minority. Minorities are largely left with existing bonds pushing further down the hierarchy. This type of unequal treatment comes from the name of the debt restructuring circle. “Creditor Creditor Violence.”
Perhaps the hurtful feelings are worth it in the end. This deal certainly helps Richard Baker, the owner of Sachs billionaire. Because the restructuring avoids bankruptcy, where he can prove his fairness is worthless. Baker is already busy. He also owns Hudson’s Bay, a Canadian department store retailer, amid bankruptcy proceedings.
The loss-making Sachs believes that cost savings and various accounting adjustments will allow them to earn $1 billion in EBITDA in 2026. This suggests a company that costs just under $6 billion, valued at the same multiples as its luxury rival Nordstrom was recently acquired. But even in this rosy scenario, equity appears to be of little value, as there is a group debt of over $5 billion.
Retailers tend to use intellectual property, real estate and inventory as security to kick cans to raise capital when they are in the disastrous straits. Still, lenders to the sector are burned. An analysis from Fitch’s assessment revealed that 34 of the 79 recent retail bankruptcies ended with liquidation instead of restructuring.
Saks often occur when creditors are funded during periods of market complacent, allowing creditors to oppose each other because they are mounted in a rather loose state. It encourages borrowers to try different stunts to avoid bankruptcy. But like credit-fueled Holiday Splage, the bill will ultimately go through a deadline. Saks will take six months to pay the next interest. There’s less Christmas than Merry.
sujeet.indap@ft.com
