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Neiman Marcus pays sponsors $443M dividend

by Richard Collings | Published April 2, 2012 at 3:41 PM

Neiman Marcus Inc. has paid private equity backers TPG Capital LP and Warburg Pincus LLC a $442.6 million dividend, signaling that the department store chain is well past its recent financial struggles.

The dividend, made on Friday, March 30, is Neiman Marcus' first payment to investors since its $4.7 billion leveraged buyout in October 2005, confirmed a source with knowledge of the deal.

Perhaps most notably, the payment may be a prelude to an initial public offering of Neiman Marcus stock later this year. An industry consultant noted that it is not unusual for private equity-owned businesses to pay a dividend to its sponsors prior to going public.

TPG, Warburg Pincus and Neiman Marcus declined to comment.

Neiman Marcus will pay the $442.6 million dividend with $150 million in borrowings from its asset-based revolving credit facility, while the rest will be funded from its cash on hand. Cash on Neiman Marcus' balance sheet was $433 million as of Jan. 28, according to filings with the Securities and Exchange Commission.

For Neiman Marcus, paying the dividend is likely not much of a risk, as the retailer will not add much to its overall debt load, the consultant said. Neiman Marcus reduced its long-term debt from about $3.2 billion in 2005 to about $2.68 billion as of Jan. 28, according to SEC filings.

The dividend payment marks a clear sign that the retailer is confident not only in its own business going forward, but also in the U.S. economy, the consultant said. Luxury retailers such as Neiman Marcus are seen as better-positioned to withstand a slowdown if it does occur, the consultant added.

Retailers recovering from the recession including Neiman Marcus competitors Nordstrom Inc. and Ralph Lauren Corp. largely chose to sit on their cash as insurance in case there was another downturn. Nordstrom Inc. had nearly $1.9 billion in cash for the quarter ending Jan. 28, while Ralph Lauren had about $816 million in cash as of Dec. 31, according to regulatory filings.

The consultant said Neiman Marcus is not opening many new stores and is currently generating Ebitda margins of about 13%, making it possible for the company to pay down debt and pay out dividends.

Typically, a retailer seeks to achieve a debt-to-Ebitda ratio of about 4.5 times before going public, the consultant said.

As of March 29, according to investment bank Financo Inc.'s Credit Monitor, Neiman Marcus' Ebitda over the last 12 months was about $558 million, or 13.3% of sales, giving the company a roughly 4.8 times debt-to-Ebitda ratio. That stands in contrast to the nearly $3 billion in debt the company had as of August 2009, about 11 times its 12-month adjusted Ebitda of $274 million.

The high-end retailer recorded a net earnings loss of $668 million in 2009 due to impairment charges of $703 million. Its revenue bottomed out that same year, plummeting to about $3.6 billion from $4.6 billion from the same period a year earlier.

The total value of Neiman Marcus' October 2005 LBO was $5.1 billion, but the retailer had $400 million to $500 million in cash on its balance sheet that was utilized in the financing of the deal. As a result, the actual purchase price was nearly $4.7 billion, or about 9 times its Ebitda as of July 2005 of roughly $519 million.

The acquirers sunk roughly $1.47 billion in equity to help finance the buyout, of which TPG and Warburg Pincus contributed $1.23 billion. The remainder was financed with $3.2 billion in long-term debt.

Moody's Investors Service Inc. said on Friday that Neiman Marcus' special dividend would have no immediate impact on its B2 corporate family rating, its speculative grade liquidity rating of SGL-1, or on its stable outlook for the retailer.

Fitch Ratings Inc., however, lowered Neiman Marcus' outlook to stable on March 5, when it became known that the retailer intended to pay a dividend of up to $500 million. Fitch affirmed its issuer default rating of single-B, five steps below investment grade. Fitch noted that Neiman Marcus' debt of $2.68 billion was down 6.9% from a year earlier.

Meanwhile, Standard & Poor's Ratings Services affirmed all ratings on March 13, including the retailer's B+ corporate credit rating, noting a stable outlook.

-- David Carey contributed to this story.

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