The debt watchdog put the luxury retailer’s “CCC-plus” rating on creditwatch negative due to the company’s “less-than-adequate liquidity” as well as “the uncertainty of how the company will remedy its current liquidity position.”
S&P said the company’s finances will “likely lead to additional challenges in building seasonal inventory while executing on its synergy initiatives from its acquisition of Neiman Marcus.”
A “CCC” rating means the debt is “currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions.”
Saks purchased competitor Neiman Marcus for $2.7 billion in December — with help from Amazon and Salesforce and an eye toward forging a luxury powerhouse both online and off.
Saks launched a digital storefront with Amazon, which helped fund its acquisition of Neiman Marcus.
To get there, the business is being reset and looking to reverse sales declines. Revenues at the Saks banner fell 20 percent last year due to “disrupted inventory flow” while Neiman Marcus was down 2 percent, according to S&P.
To close the Neiman’s deal, Richard Baker, executive chairman and architect of the acquisition, sold $2.2 billion in junk bonds paying 11 percent interest in December.
While that looked good then — the debt offering was upsized from $2 billion due to demand — the bloom has come off the rose and the financing has started to look even more aggressive given the uncertain retail environment.
Saks chief executive officer Marc Metrick said late last month the company was looking to bolster its balance sheet, exploring the possibility of carving a $300 million FILO facility out of the existing $1.8 billion asset-backed loan. Financial advisers Bank of America and PJT Partners as well as law firms Willkie Farr & Gallagher and Kirkland & Ellis have been brought on board to help.
“I’ve got a big plan for transformation, I’ve got to invest in that transformation,” Metrick told WWD last month. “I’ve got to be a strong counterparty to my brand partners and we’re seeing a turbulent market. There’s a lot of unknowns with what could happen, and I’m further fortifying my balance sheet. That’s what I’m doing.”
Marc Metrick, CEO of Saks Global.
S&P said the proposed FILO facility would give the company additional flexibility and some short-term liquidity relief, but that “we estimate incremental annual interest expense will further depress [the free operating cash flow] deficit going forward.”
Saks is also said to be looking into the sale of assets from its $4.4 billion real estate portfolio, a sale-leaseback transaction or the spinoff of noncore assets.
But it’s been hard to calm the creditors’ nerves.
The bonds were trading at 97 cents on the dollar at the start of the year, but dropped to a new low, below 54 cents, on Tuesday.
As Saks looks to beef up its financing, it could take on obligations that would be above the bonds in the debt pecking order, potentially setting up a period of negotiation between the company and its lenders.
“There’s going to be all kinds of drama,” said Tim Hynes, global head of credit research at Debtwire, which both analyzes and reports on the debt market.
Debtwire reported that some of the bondholders had hired law firm Paul, Weiss and financial advisor Lazard to look after their interests. (Neither company immediately responded to a WWD request for comment on Wednesday).
“I can’t say 100 percent, but they’ll get financing to get through this season. They’ll get through this holiday season. After that I can’t be sure.”
He said bondholders that bought in after the price of the debt fell could also decide to give the company more money to get it through the lean time.
Sources said the company still has access to liquidity of nearly $400 million and is positioned to make its $120 million interest payment on June 30 while also keeping up with vendor payments.
Saks’ troubles this year started with vendors, who were hoping for more stability after the Neiman’s deal closed, but instead got a promise that past-due bills would be paid in installments over a year and that new shipments would be paid in 90 days, not 30.
While the worries seemed to migrate from vendors to bondholders this spring, the relationship between vendor and retailer remains key to the financial equation.
S&P estimated the company had about $1 billion in outstanding debt on its asset-backed loan as of Feb. 1, a result of the Neiman’s deal, delayed vendor payments, seasonal draws and one-time expenses.
“At the same time, the company’s efforts to stretch payables have resulted in vendors withholding inventory receipts, which constrained the ABL borrowing base,” S&P said. “While inventory receipts on [the] Saks banner improved to levels similar to fiscal 2023, which also saw inventory challenges, inventory receipts on [the] Neiman Marcus banner are higher year over year.
“We forecast a [free operating cash flow] deficit for both 2025 and 2026, which could hinder its ability to sustain adequate inventory flow over the next 12 months, including the critical holiday season,” the rating agency said.
The S&P update underscores, again, just how fine a line Saks Global is walking as it seeks to reinvent.
Not only does the company have to keep vendors on its side, it has to cut costs as it melds Neiman’s into Saks to make its financing work.
S&P said it revised its assessment of the company’s “tight liquidity” to “less than adequate” and said its capital structure is “unsustainable because it is highly dependent on synergies from its acquisition.”
Saks has identified $286 million in cost synergies this year, cutting workers and tweaking the supply chain, S&P said.
“Liquidity constraints could lead to delays in the company fully realizing further synergy benefits this year,” the rating agency said. “In addition, we believe new tariffs and lower operating leverage will negatively affect the company’s operating performance.”
The pressure is on.
S&P said there was at least a 50 percent likelihood that it could lower its rating on Saks “by up to two notches over the next few weeks to several months as we get more visibility on the company’s liquidity position and its ability to service its fixed charges.”
