Saks Global Faces Liquidity Need Amid Continued Vendor Issues; Bondholders Weigh Lack of Direct Collateral Support as New-Money Options Take Shape

Octus, formerly Reorg, estimates that Saks Global will need to raise new money ahead of its planned vendor catch-up payments, a $121 million bond coupon payment next month and its seasonal inventory build this fall. In our opinion, the company’s continued vendor issues have led to a precipitous sales decline and thus elevated cash burn over the last two years.

Less than six months after completing its acquisition of Neiman Marcus, Saks Global indicated last month that it was contemplating a first-in, last-out, or FILO, loan of $300 million. However, we estimate that the company could potentially need more liquidity, as illustrated below.

Below, we discuss several liquidity headwinds that may not be explicitly captured in the above analysis.

Liquidity Headwinds Include Seasonal Working Capital Needs, Looming Debt Maturities

As a business with a large element of seasonality, Saks Global needs to fund its inventory build ahead of its peak holiday selling season. We estimate that about 30% of the combined company’s $4.5 billion of annual purchases are typically made in the fiscal third quarter from August through October, which is about $300 million higher than the quarterly average for the rest of the year.

The company also potentially faces looming debt maturities, although we base this on information from a December 2024 offering memorandum, which provided financials as of August 2024, and as such, we are unsure if the terms on the following debt instruments have changed in the interim.

As of December, Saks Global was party to a $325 million HoldCo seller note due in April 2026, which effectively reflects a deferred portion of the consideration for its acquisition of Nieman Marcus. According to Octus reporting last week, the note bears PIK interest and is held by Davidson Kempner, Sixth Street and PIMCO, who were Neiman’s largest equityholders upon its emergence from bankruptcy. If this debt is not discharged by its maturity date, holders would have the right to foreclose upon the collateral supporting this secured debt instrument, which includes a controlling stake of the equity of Saks Global, according to the OM.

Saks Global owns about 62% of a joint venture – referred to as the HBS JV – with Simon Property, among others, that held 36 properties in the United States as of Aug. 3, 2024, comprising Saks Fifth Avenue and Lord & Taylor stores. According to the December OM, the HBS JV had $614 million outstanding, with $383 million allocable to Saks Global, on a loan set to mature on Aug. 1, 2025. Although this loan is secured by a first lien mortgage on the fee and leasehold interests of 30 properties in the HBS JV, it is worth noting the maturity date in case the value of collateral is insufficient to warrant full refinancing.

Additionally, although the company’s $2.2 billion in 11% senior secured notes does not mature until 2029, the first coupon payment of $121 million is due in the middle of June. The bond price has plummeted from the mid-90s in February to under 40 due to the company’s cash burn, a lack of true collateral support and creditors’ concerns regarding the potential for this debt to be primed or diluted by a new-money raise.

Liquidity Options Include Debt Raise(s), Asset Sales

We believe that the company can raise debt and sell assets to address its cash burn and near-term liquidity headwinds. The company said in late April that it was considering a $300 million FILO facility that would be structured within its existing $1.8 billion ABL facility. Octus reported last week that Paul Weiss and Lazard, as advisors to an ad hoc group holding more than 50% of the bonds, indicated that Saks has about $200 million of debt capacity on top of the $300 million FILO, which would imply $500 million of total new money.

As discussed above, we think the company might need more than the $300 million FILO loan in the near term. Octus reported that, as of May 20, the majority ad hoc group had rejected additional holders from joining and that a group of bondholders not in the ad hoc group were consulting with Glenn Agre. We think that a liability management exercise is possible because of the company’s liquidity needs, current bondholder dynamics and the looming HoldCo note maturity next year.

In addition to a potential debt raise, the company can pursue asset sales to bolster liquidity. The company has more than $5 billion of owned real estate between the Saks flagship and other Saks and Neiman stores on the basis of appraisals done last spring. The company has indicated that it is pursuing real estate sales, but, in our opinion, it may be difficult to quickly monetize a meaningful amount of real estate.

The company may also seek to sell stakes in its digital operations similar to 2021, although we believe valuations for these businesses have dropped meaningfully in recent years given the sales declines and lower market demand for e-commerce businesses now than in 2021, when Insight Partners invested $500 million for a 25% stake in the Saks e-commerce platform and invested $200 million for a 20% stake in the Saks Off Fifth e-commerce platform.

As part of its acquisition of Neiman Marcus, Insight Partners contributed its equity interest in the Saks e-commerce platform to Saks Global in exchange for becoming a Saks Global shareholder. However, the Saks Off Fifth e-commerce platform, which is 80% owned by Saks Global, is held by an unrestricted subsidiary that has not pledged its equity to the bondholders, according to the OM.

Cash Cost to Catch Up Vendors Could Total Several Hundred Million Dollars

The company’s issues with its vendors appear isolated to the Saks silo, pre-date the Neiman acquisition, and have caused vendors to leave the platform or reduce the volume of products they ship to Saks. Amid liquidity challenges last year, Saks increased borrowings on its ABL facilities and secured additional debt financing for both its store and digital operations.

Saks’ trade payables balance jumped by 67% to $1.1 billion as of August 2024 from $675 million as of January 2023. By contrast, Neiman, which generates higher overall net sales than Saks, had a much smaller accounts payable balance of $184 million as of August 2024, which was down from $232 million a year earlier.

In a February interview, CEO Marc Metrick said that Saks notified vendors of a new payment schedule indicating that effective March 1, vendors will be paid 90 days from receipt of inventory and that all past due balances will be paid in 12 monthly installments beginning in July. For the 26 weeks ended Aug. 3, 2024, Saks’ days payable outstanding, or DPO, was 180 days, up from around 110 days for the year ended Feb. 3, 2024, and much higher than Neiman’s DPO of 30 days.

In the analysis below, we multiply DPO by the cost of goods sold per day, which has been declining amid lower sales, to get the implied cash outflow required to bring Saks’ DPO from 180 days to lower levels. We understand that Saks’ DPO could have changed meaningfully since Aug. 3, 2024, and that this methodology is slightly different from management’s proposed vendor repayment plan, but we think it represents a reasonable proxy of the potential cash outflow required to address Saks’ vendor issues.

In order to get to management’s 90-day DPO target for Saks, we estimate that the cash hit could be in the $300 million to $500 million range, although actual figures may vary materially from our estimate, which is based on data as of Aug. 3, 2024.
 

We would note that the company can lower its potential payables-related cash hit by cutting vendors; increasing its DPO target from 90 to 120 days, at least temporarily to preserve liquidity; and using its increased scale with Neiman to extract vendor payment discounts. The company has indicated it is aiming to cut about 25% of its vendor base and could seek to further lower the actual cash hit by using their increased scale to put pressure on certain vendors during negotiations. As a result, we have assumed a hypothetical 25% haircut to the amount owed in our above analysis.

The company’s potential cash hit could be higher if vendors tighten terms amid potential tariff-related supply disruptions and demand uncertainty. Neiman’s DPO level prior to the acquisition was around 30 days, and we think the typical range for department stores should not go above 60 days, even for a stressed retailer. It is possible that some vendors, especially larger ones, may threaten to leave the platform if terms are not tightened to industry-standard levels. If the situation deteriorates and vendors hypothetically require cash on delivery, we estimate that the cash outflow could approach $1 billion.

As a result, at least in part, of these vendor issues leading to Saks not getting enough product from vendors, Saks’ financial performance has deteriorated in recent years. The off-price and digital operations have been hit particularly hard from a comparable sales perspective, as shown below:
 

Bondholders’ Collateral Includes Equity in Subsidiaries That Hold Real Estate, IP

A key theme causing concern for bondholders and contributing to the bond price decline, in our opinion, is that most of Saks Global’s assets do not directly serve as collateral for the bonds. Instead, bondholders are entitled to the equity value that flows up from the subsidiaries that hold these assets.

In addition to its operations, Saks Global had assets appraised at $6 billion of value (as of August 2024) comprising its flagship property, other owned and ground leased real estate, its real estate development portfolio, and its intellectual property. These assets generally sit in unrestricted subsidiaries, which are indirectly owned by Saks Global. Thus, any liabilities incurred at these subsidiaries could reduce the value that flows up to bondholders.
 

We have several concerns about the collateral value. The Saks flagship store is located in the world’s most expensive retail corridor, according to Cushman and Wakefield, and has seen its appraised value fluctuate materially over the years. It was appraised at $3.7 billion in 2014, then $1.6 billion in 2019 and most recently $3.6 billion in 2024.

The property may not be worth its $3.6 billion appraised value, however. The company took out a $1.25 billion mortgage on the property in 2014, and it was marked at 90 cents on the dollar as of Feb. 3, 2024, down from 93 cents on the dollar a year earlier, according to the December OM. Further, it is unclear what the development plans are for this location after Saks dropped its casino bid last month.

It is worth noting that per the financing statements, as of Aug. 3, 2024, the HBS JV had $750 million in book value of assets and an equal amount of liabilities, primarily comprising debt, implying no equity value. The appraisal indicated $1.2 billion of equity value comprising $700 million of store real estate and $500 million of real estate development value.

Obviously, book value varies from appraised value, but these data points could indicate that the real estate value is below its appraised values. Another consideration is the $614 million HBS JV real estate loan due on Aug. 1, which will need to be addressed, assuming there have been no material changes to this facility since the release of the December OM.

As reported by Octus, a portion of the IP, which could be material, has been transferred to IPCos and thus is not required to be pledged as collateral for the bonds. This was highlighted in the OM as a possibility, and we view this as an expected outcome. The OM stated that the equity of IPCos would support the bonds but acknowledged that any liabilities incurred at these subsidiaries would reduce the value that flows up to bondholders.

As part of the Neiman transaction, Saks Global and brand management company Authentic Brands launched a 50/50 joint venture called Authentic Luxury Group, or ALG. As part of the agreement, Saks Global would grant ALG exclusive licenses and make purchase commitments for certain of Authentic’s brands, including Barneys New York, Judith Leiber Couture, Hervé Léger and Vince. Saks Global’s initial 50% equity stake in ALG, however, was not pledged as collateral to support the bonds, according to the OM.