10/4/2020 Neiman Marcus: how a creditor’s crusade against private equity power went wrong | Financial Times

The Big Read Neiman Marcus Group Inc

Neiman Marcus: how a creditor’s crusade against private equity

power went wrong

Dan Kamensky wanted to expose how lenders and bondholders get a raw deal in restructurings but
could now face prosecution

Sujeet Indap and Mark Vandevelde in New York OCTOBER 3 2020

When Neiman Marcus filed for bankruptcy protection in May it felt like an
American tragedy. The closure of the 113-year-old luxury department store chain
had been triggered by lockdowns to control the coronavirus pandemic, leaving its
14,000 workers on furlough. There was concern among creditors and lenders that
a long-drawn out Chapter 11 process could lead to the retailer’s liquidation.

Yet, for one hedge fund manager the court-supervised process represented an
opportunity. Dan Kamensky, the founder of a small hedge fund, Marble Ridge
Capital, had spent the previous two years brawling with Neiman’s owners, Ares
Management — a $165bn California asset manager — and the Canada Pension Plan
Investment Board.

Mr Kamensky had no interest in taking over Neiman Marcus. Rather his grievance
was over a complex debt restructuring in 2019 where he claimed that the chain
store’s owners had improperly seized the company’s prized asset, online retailer
MyTheresa, away from creditors.

Ares and CPPIB saw taking control of MyTheresa as a move that could enable
Neiman’s shareholders and its creditors to salvage at least some value from an
otherwise disastrous $6bn leveraged buyout. But the move, claimed Mr Kamensky,
had cheated creditors. His campaign, however, had gained little traction. Now with
Neiman in front of a federal bankruptcy judge he saw a fresh chance to make his
argument in court.

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Neiman Marcus, which filed for bankruptcy in May, has vacated its location in Hudson Yards in New York © Richard B.
Levine/Alamy
The 47-year-old former lawyer had assembled a case not just focused on what he
believed was the abuse of creditors by private equity firms. Mr Kamensky also
wanted to shine the light on what he said were systemic problems, where top law
firms and investment banks worked with buyout groups to crush lenders and
bondholders who otherwise should have become the rightful owners of failed
companies.

By late July, a Houston bankruptcy court had aired his allegations that Ares and
CPPIB had fraudulently transferred MyTheresa away from creditors. Two separate
court-ordered investigations found at least “viable” claims of fraudulent transfers.
And Mr Kamensky had helped wring out a $172m settlement for junior Neiman
creditors including the likes of Estee Lauder and Chanel.

The victory was shortlived. At 6am on September 3, FBI agents arrested Mr

Kamensky at his suburban New York home on suspicion of fraud, extortion and
bribery after he was accused of pressuring a rival not to bid for assets won in the
settlement so Marble Ridge could buy them at a cheaper price. Prior to the
criminal allegations, Mr Kamensky admitted to Department of Justice
investigators that by trying to influence a rival bidder he had made a “grave
mistake”.

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Dan Kamensky, the founder of a small

hedge fund, Marble Ridge Capital, has
criticised the governance of Neiman
Marcus © Jewish National Fund
The arrest shocked Wall Street. And while his plight has elicited little sympathy,
Mr Kamensky’s crusade over private equity aggression has struck a chord with
many in the distressed debt market. Creditors like Marble Ridge for years had been
complaining about how buyout firms with stakes in companies such as Toys R Us
and J Crew had been pushing legal and ethical boundaries to avoid having their
investments wiped out.

Mr Kamensky, maligned at once by the owners of Neiman Marcus and shunned by

some fellow creditors, had been the rare hedge fund manager willing to expose the
ugliness of the private equity/hedge fund wars. That has now been overshadowed
by his own misbehaviour.

“There used to be a sense that private equity firms needed to take care of the
lenders that funded their LBOs,” says Jared Ellias, a former bankruptcy lawyer
who is a professor at the University of California, Hastings. “Now, they don't seem
to care at all and they have no qualms about burning their lenders really badly.”

The $6bn LBO

Antony Ressler made his name as a junk bond banker at Drexel Burnham Lambert
in the 1980s. After Drexel’s bankruptcy he and Leon Black — his brother in-law —
joined forces to form Apollo Global Management. In 1997, Mr Ressler departed
Apollo to form his own investment company named after the Greek god of war,
Ares, a sibling of Apollo.

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In 2013, Ares announced, in partnership with CPPIB, its acquisition of Neiman

Marcus for $6bn. It was one of the biggest leveraged buyouts since the financial
crisis. Yet the two investment groups had put in less than $1.5bn combined of the
Neiman Marcus purchase price and by 2017, the retailer was struggling under the
weight of nearly $5bn of buyout debt with sales and profit in steady decline.

By 2018 it wanted to refinance its debts. But by September of that year the gap
between the owners and creditors — Neiman was asking them to accept big losses
to the face value of their holdings — was so large that the talks collapsed.
Bankruptcy seemed inevitable. But that would have wiped out Ares and CPPIB.
Instead the duo looked for an alternative. In 2014 Neiman had bought a promising
German ecommerce retailer, MyTheresa.com, for $200m. It was a hedge against
the declining physical retail sales at its 42 stores.

MyTheresa was almost doubling revenue every two years and by 2019 it had an
estimated valuation of at least $500m. Almost two years earlier in March 2017
while MyTheresa was prospering, Neiman and its advisers had made a seemingly
esoteric move. Taking advantage of bond and loan documents that all sides agree
had been loosely written, Neiman designated the online business as a so-called
“unrestricted subsidiary”, ending any oversight creditors had over MyTheresa. It
was an unremarkable move, the significance of which only became apparent in
September 2018 with the collapse of the refinancing talks.

With $3bn of debt falling due in 2020 Ares and CPPIB were facing a Neiman
bankruptcy. At this stage, private equity groups often walk away, accept their
losses, and hand over the keys of an overleveraged company to creditors. But in an
era of covenant-lite and covenant free debt — where companies are able to avoid
defaults — Ares had another option. With MyTheresa now an unrestricted
subsidiary, the unit was the bargaining chip that Neiman needed to keep its
investment alive. Neiman, in September 2018, shifted MyTheresa into a unit where
creditors no longer had a claim on it: it was now the sole property of Ares and
CPPIB.

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Antony Ressler, chairman and co-founder of Ares Management, made his name as a junk bond banker at Drexel Burnham
Lambert in the 1980s © Victor J. Blue/Bloomberg
After announcing the transfer, the two owners called back the creditor factions and
told them that Neiman would now like to resume refinancing talks. Over the next
five months, the sides clawed their way to a deal that pushed out Neiman’s most
imminent debt maturity to 2022. In the debt exchange, existing lenders would
swap into new loans at higher interest rates and receive some cash for their
existing holdings. Unsecured bondholders would swap into secured notes. New
bonds would be sold to raise fresh cash. And crucially, Ares and CPPIB would hand
back the first $450m in value of MyTheresa to those bondholders.

Privately many of the Neiman creditors were furious. Yet, virtually all of them got
on board with the deal. There was only one major holdout: Mr Kamensky.

Restructuring resistance
In September 2018, Mr Kamensky wrote a public letter blasting Neiman Marcus
for snatching MyTheresa even as other creditors were trying to cut a deal. He wrote
that the purpose of the transfer was to “strip an important and valuable asset away
from creditors of the company and to gift that asset to Ares and CPPIB”. He later
filed a lawsuit in Texas against Neiman Marcus, accusing its private equity owners
of executing an “intentional fraudulent transfer” of MyTheresa.

Sceptics, including some fellow creditors, believed Mr Kamensky was showboating

to raise his own profile and that of his hedge fund when a compromise deal was
possible.

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Having begun his career as a restructuring lawyer at Sidley Austin, Mr Kamensky

then made his name as a distressed debt investor at hedge fund Paulson & Co. He
was part of a team that invested in Caesars Entertainment, where creditors secured
a $6bn settlement pursuing fraudulent transfer claims against the casino chain’s
private equity owners.

By the time the bankruptcy proceedings had started Ares and CPPIB had struck a
deal to hand over the retail chain to its senior lenders such as Pimco and Davidson
Kempner, leaving junior creditors to receive just cents on the dollar. But Chapter 11
allowed all stakeholders to have a voice, even bit-part players like Marble Ridge
which owned just $60m in Neiman debt.

Mark Machin, president and chief executive of the Canada Pension Plan Investment Board. In 2013, Ares announced, in
partnership with CPPIB, its acquisition of Neiman Marcus for $6bn © Justin Chin/Bloomberg
In court documents, Mr Kamensky, alleged a broad conspiracy around the
MyTheresa transfer, accusing law firm Kirkland & Ellis and investment bank
Lazard of giving improper cover to Neiman. The two firms were hired as
restructuring advisers by the retailer in 2017 and helped design the MyTheresa
transfer and subsequent refinancing. Neither firm responded to a request for
comment. But in court documents, Neiman insisted the MyTheresa transactions
had been crafted properly, with the help of “leading financial advisers” and “world
class law firms”.

Mr Kamensky wrote in a court paper that “Kirkland and Lazard are not in a
position and cannot be expected to impartially investigate, analyse and potentially
challenge transactions that they themselves designed, implemented and
subsequently took steps to insulate, all for the exclusive benefit of the LBO
sponsors [Ares and CPPIB].”

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At a court hearing in Houston in late May, Marble Ridge argued for an

independent investigation into the MyTheresa transaction. But few expected
anything to derail an efficient bankruptcy as Neiman Marcus was racing to avoid a
liquidation. And Mr Kamensky did not have the full backing of other creditors.

Marc Beilinson, a Neiman independent director, then testified. He sought to

reassure the court that an investigation he was conducting into MyTheresa would
look into Mr Kamensky’s claims. But he stumbled horribly when Judge David
Jones asked him to explain his job as an independent director.

Judge Jones later said in court that “what he [Beilinson] gave me was a line of bull.
And I don’t appreciate it . . . I expect transparency, I expect forthrightness, and I
got neither today from him . . . I do not want to see a fiduciary to this estate ever
appear in front of me again unprepared, uneducated and borderline incompetent.
Never.”

Mr Kamensky had criticised the governance of Neiman Marcus, accusing directors

of being well-paid stooges for Ares and CPPIB. The testimony of Mr Beilinson —
who said in court that he had served as a director at around 20 different companies
over his career including several that were distressed or in bankruptcy — seemed
to vindicate some of that criticism.

Neiman Marcus bought MyTheresa.com for $200m in 2014. Its estimated value in 2019 was more than double that © Hannes
Magerstaedt/Getty
His inability to explain his role shone an uncomfortable light on directors in
private equity-owned businesses who are typically recruited by law firms. Almost
all are retired lawyers, bankers, investors or executives looking for a lucrative but
often untaxing job. They are often seen by critics, as reliable rubber-stamps for
private equity firms.

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After the Beilinson testimony a court ordered investigation conducted by a

committee of unsecured creditors — including Mr Kamensky — concluded in July
that Neiman Marcus was deeply insolvent at the time of the transfer of ownership
of MyTheresa. It said Ares and CPPIB had “pilfered at least hundreds of millions of
dollars of value” in the MyTheresa transaction.

The insolvency finding implied that the company's directors — including

independents — had a broader fiduciary duty to creditors in addition to just
shareholders at the time of the transfer. This raised the question of whether they
should have blocked the no-value MyTheresa transfer. Lazard and Kirkland & Ellis
had helped shape Neiman’s view, according to the report, that it was solvent in
2018 — even as its debt was trading for 62 cents on the dollar.

Kamensky overplays his hand

Ares dismissed the creditors’ committee report as a biased, pre-determined hit job.
But after Mr Beilinson quit, Scott Vogel, the other independent director and a
veteran distressed debt investor, conducted his own inquiry. He wrote to the court
in late July that the reorganised Neiman company holds “viable claims based in
constructive fraudulent conveyance because the company was likely insolvent at
the time of the [MyTheresa] distribution”.

Mr Kamensky’s doggedness, once dismissed as futile, had paid off. In exchange for
being released from further legal liability and ending the dispute, Ares and CPPIB
agreed to give back $172m to unsecured creditors, mostly in MyTheresa preferred
stock.

Realising that many of the other junior creditors would be uninterested in taking
MyTheresa equity and waiting years for Neiman to sell it, Mr Kamensky believed
he could wring some extra profit from the opportunity he had created. So he
offered to buy out other creditors for 20 cents on the dollar.

After discovering that the investment bank Jefferies was also considering a bid —
one higher than his — for the MyTheresa shares, Mr Kamensky called the
investment bank threatening to stop doing business with Jefferies, where he was a
client, if they got in his way. Having spent nearly $4m fighting Neiman Marcus, he
explained, that he was determined to enjoy the spoils. In chat messages sent
through Bloomberg terminals, Mr Kamensky used intimidating language — “DO
NOT SEND IN A BID” read one of them, according to an investigation published
by the Department of Justice. Jefferies later reported Mr Kamensky’s actions to
other creditors.

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“I am sorry to see the ugly turn of events,” says Sara Tirschwell, a longtime
distressed debt investor who had once planned to go into business with Mr
Kamensky. “But happy that Dan finally exposed the bad faith schemes that private
equity sponsors use to keep assets out of reach from creditors”.

Ares insists that the MyTheresa transaction was above board and was designed to
maximise value for all stakeholders in Neiman Marcus. The firm has pointed out
that it had never taken any fees or dividends out of the retail business or missed a
principal or interest payment to creditors. And in the 2019 refinancing transaction,
Ares had invested another $100m that now has been mostly lost — further
evidence, its supporters argue, that it believed the company was solvent and acted
in good faith.

Neiman Marcus exited Chapter 11 in late September at just a $2bn valuation.

MyTheresa remains a separate company. Marble Ridge is in the process of
dissolving its operations. And while the $172m for unsecured creditors remains in
a trust, Mr Kamensky — whose campaign wrung the payment out of Neiman
Marcus — is trying to avoid jail.

Copyright The Financial Times Limited 2020. All rights reserved.

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