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Rating Action:

Moody's downgrades Neiman Marcus' CFR to B3; rates proposed term loan B2

07 Oct 2013

Approximately $4.6 billion of rated debt securities affected

New York, October 07, 2013 -- Moody's Investors Service today downgraded Neiman Marcus Group LTD, Inc.'s ("NMG") Corporate Family Rating to B3 from B2 and its Probability of Default Rating to B3-PD from B2-PD. The company's Speculative Grade Liquidity rating was also lowered to SGL-2 from SGL-1. At the same time, Moody's assigned a B2 rating to NMG's proposed $2.95 billion term loan, and a Caa2 rating to the company's proposed senior unsecured notes.

This concludes the review for downgrade that was initiated on September 10, 2013. The rating outlook is stable.

The downgrade of NMG's Corporate Family Rating acknowledges that the company's debt levels will increase to about $4.6 billion from $2.7 billion as a result of NMG's $6 billion leveraged buyout by Ares Management, LLC and the Canada Pension Plan Investment Board. Moody's expects that NMG will not be able to materially reduce its debt levels over the next eighteen months resulting in debt to EBITDA remaining above 7.0 times. The proceeds from the proposed senior secured term loan and senior unsecured notes will be used to finance NMG's leveraged buyout. In addition, the financial sponsors along with management expect to contribute about 25% of the purchase price.

The downgrade of NMG's Speculative Grade Liquidity rating to SGL-2 acknowledges that Moody's expects NMG to maintain lower cash balances going forward that it has historically. It also acknowledges that a sizable amount of NMG's free cash flow will be used to fund a mandatory cash flow sweep to repay its term loan. However, NMG's proposed $800 million asset based revolving credit facility supports it maintaining good liquidity.

Ratings assigned subject to receipt and review of final documentation:

Proposed $2.95 billion term loan due 2020 at B2 (LGD 3, 38%)

Proposed $960 million senior unsecured notes due 2021 at Caa2 (LGD 5, 85%)

Proposed $600 million senior unsecured notes due 2021 at Caa2 (LGD 5, 85%)

Ratings downgraded:

Corporate Family Rating to B3 from B2

Probability of Default Rating to B3-PD from B2-PD

Speculative Grade Liquidity rating to SGL-2 from SGL-1

Ratings confirmed and LGD point estimates revised:

Neiman Marcus Group, Inc. (Old) $121 million senior secured debentures due 2028 at B2 (to LGD 3, 38% from LGD 4, 53%)

Ratings affirmed:

$2.56 billion senior secured term loan due 2018 at B2 (LGD 4, 53%)

The rating on the $2.56 billion senior secured term loan due 2018 will be withdrawn upon the closing of the transaction and its repayment in full.

RATINGS RATIONALE

NMG's B3 Corporate Family Rating reflects its very high leverage as a result of the buyout. Moody's estimates that NMG's debt to EBITDA will remain above 7.0 times over the next eighteen months. The rating also acknowledges NMG's moderate interest coverage with EBITA to interest expense pro forma for the transaction of 1.8 times at August 3, 2013. Partly mitigating NMG's very high leverage, and the primary support for the B3 Corporate Family Rating, is Moody's view that the luxury goods market is insulated from certain economic pressures such as higher taxes and weak wage growth. Moody's also believes that it is insulated from a degree of capital markets volatility but is exposed to a prolonged decline in the equity markets. Thus, barring a sustained decline in the equity markets or a shock to the economic system, NMG's performance will likely remain solid. Positive ratings consideration is also given to NMG's well-know reputation in the luxury goods market, strong execution ability, and good liquidity.

The stable outlook reflects Moody's view that NMG will experience earnings improvement as the luxury goods market continues to grow, albeit not enough to materially reduce the company's absolute debt levels and leverage over the next eighteen months. Ratings could be upgraded if NMG demonstrates the ability and willingness to achieve and maintain debt to EBITDA below 6.75 times and EBITA to interest expense above 1.5 times. Ratings could be downgraded if EBITA to interest expense falls below 1.25 times for any reason. Negative rating pressure could also develop should liquidity materially deteriorate.

The B2 rating on the proposed $2.95 billion senior secured term loan is one notch higher than the Corporate Family Rating due to its size and position in the capital structure. The term loan is secured by a first lien on all fixed assets and a second lien on accounts receivable and inventory. This places it behind the proposed $800 million asset based revolving credit facility and ahead of the proposed $1.46 billion in senior unsecured notes. The proposed $1.46 billion in senior unsecured notes are rated Caa2 due to the junior position in the capital structure behind the asset based revolving credit facility and term loan.

The principal methodology used in this rating was the Global Retail Industry Methodology published in June 2011. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Neiman Marcus Group LTD, Inc., ("NMG") headquartered in Dallas, TX, operates 41 Neiman Marcus stores, 2 Bergdorf Goodman stores, 6 CUSP stores, 36 clearance centers, and a direct business. Total revenues are about $4.6 billion.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Margaret Taylor
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Janice Ann Hofferber
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's downgrades Neiman Marcus' CFR to B3; rates proposed term loan B2
No Related Data.
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