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Neiman Marcus reaches settlement with creditors over MyTheresa claims

Neiman Marcus Group Inc. has reached a settlement with unsecured creditors on fraudulent conveyance claims arising out of the company’s MyTheresa transactions, according to a series of court filings in the company’s Chapter 11 case.

The settlement will allow a hearing on approval of the company’s proposed disclosure statement, which was scheduled for the afternoon of July 30 in bankruptcy court in Houston, Texas, to proceed. The company amended its request, however, to set a voting deadline for creditors of Aug. 31, and a confirmation hearing date of Sept. 4, slightly delayed from its original motion.

According to a statement filed in the case by Scott Vogel, the company’s sole disinterested manager that had been investigating the MyTheresa claims on behalf of the company, the settlement was reached on July 30.

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According to a revised reorganization plan and disclosure statement filed on July 30, the settlement provides that Neiman Marcus Group Inc., the parent company of MyTheresa and of the company’s units that are in Chapter 11 (although the parent itself is not in Chapter 11), will contribute 140 million shares of series B preferred stock in MyTheresa to the Chapter 11 estate, which will contribute the shares to a recovery pool for unsecured creditors holding both funded and unfunded claims.

The shares constitute 56% of the MyTheresa series B preferred shares, according to the amended disclosure statement.

The parent is controlled by the company’s sponsor, Ares Management and the Canada Pension Plan Investment Board.

The company, meanwhile, will contribute $10 million in cash to the unsecured creditor recovery.

Last, but not least, the company’s term loan lenders, second-lien noteholders, and third-lien noteholders, will waive their right to assert deficiency claims in the case, eliminating potential claims totaling about $3.35 billion from the pool of general unsecured claims.

According to the revised disclosure statement, the settlement translates to a recovery for the company’s unsecured creditors in a range of 1.7% to 34.4%, with the low end assuming the MyTheresa series B preferred stock is worth zero, and the high end assuming it is worth $275 million. The disclosure statement provides that funded unsecured debt claims would be allowed in the amount of roughly $137.3 million, and non-funded GUCs would be allowed in the amount of $339.7 million to $434.7 million.

Recoveries for senior creditors under the plan were unchanged.

As reported, holders of the company’s 2019 extended term loan would receive 87.5% of the equity in the reorganized company and 87.5% of the rights to participate in a contemplated exit financing facility under the plan. Term loan claims would be allowed in the amount of $2.25 billion, and the recovery rate would be 32.99%, according to the disclosure statement.

The company’s second-lien noteholders, with allowed claims of roughly $605.9 million, would receive 1% of the reorganized equity and participation rights in the exit loan, respectively, along with seven-year warrants (no Black-Scholes protection) to purchase up to 25% of the reorganized equity at an agreed-upon strike price, and a distribution of value of MyTheresa (which is not further described in the disclosure statement), equating to a recovery of 1.4%.

Third-lien noteholders, with allowed claims of $1.29 billion, would receive 8.5% of the reorganized equity and exit loan participation, respectively, along with a distribution of value in MyTheresa (which is not further described in the disclosure statement), equating to a recovery of 5.62%.

Holders of the company’s 7.125% senior debentures due 2028, with an allowed claims of $128.9 million, would receive 2.8% of the reorganized equity and exit loan rights, respectively, for a recovery rate of 18.76%.

Finally, holders of a small amount of 2013 stub term loans with the original maturity date of Oct. 25, with allowed claims of $12.6 million, would receive 0.2% of the reorganized equity and exit loan rights, respectively, subject to redistribution among other secured lenders if holders of the stub term loan reject the proposed reorganization plan, a recovery of 12.75%.

Key to progress
Resolution of the controversial MyTheresa claims was key to moving the case forward.

As reported, on July 17 the unsecured creditors’ committee in the case filed the preliminary findings of its investigation into the company’s MyTheresa transactions, concluding that they would give rise to both constructive and actual fraudulent conveyance liability, potentially worth “hundreds of millions” to the company’s unsecured creditors.

Those claims were unsealed to the public, albeit in redacted form, on July 24.

Notably, Vogel, whom unsecured creditors had suggested would whitewash the potential claims at the direction of the company, and who had previously been admonished by the bankruptcy judge overseeing the case as unprepared, “uneducated and borderline incompetent,” said he notified the bankruptcy court last week that he had concluded that “at the very least” there were constructive claims of fraudulent conveyance available to the company because the company was likely insolvent at the time of the transactions.

Vogel also announced that he had been working on a settlement of the potential claims with the stakeholders in the case since early July.

In a nutshell, the MyTheresa transactions, which played out over a period of several years, involved, among other things, the 2017 redesignation of the company’s subsidiaries that controlled MyTheresa as “unrestricted” in order to free MyTheresa from certain restrictive covenants. Subsequently, over the next 18 months the company implemented a series of dividend transactions that transferred ownership of MyTheresa through several steps up the company’s corporate structure.

When the smoke cleared, MyTheresa was owned directly by parent company Neiman Marcus Group Inc., and the intermediate units that previously were the direct and indirect owners of MyTheresa, were now stripped of any ownership interest in the unit, thus leaving the unsecured creditors of those subsidiaries, most notably the company’s unsecured noteholders, with fewer assets to back their debts.

The company followed that up in 2019 with an exchange offer for the company’s unsecured debt—in which the vast majority of unsecured noteholders participated—into a preferred equity stake in MyTheresa and third-lien notes, and that sought to release Ares and CPPIB from fraudulent conveyance liability for the earlier transactions.

Marble Ridge Capital, an unsecured noteholder that did not tender into the exchange, had challenged the MyTheresa transfers over the past year, first in state courts in Texas and New York, and following the company’s Chapter 11 filing, in bankruptcy court.

Marble Ridge had sought the appointment of an examiner to investigate the claims, but in June, the bankruptcy court instead appointed the unsecured creditor panel, of which Marble Ridge was a member, to conduct the investigation.

This article was written by Alan Zimmerman, who covers bankruptcies for LCD News.

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