Saks Global’s new $600 million in financing has it better positioned to pay vendors and rework its business — but the way the luxury retailer is raising that money has drawn the ire of Standard & Poor’s.
The debt watchdog downgraded Saks’ credit rating to “CC,” a significant drop from “CCC-plus,” with a negative outlook.
Late last month, the retailer lined up the financing just ahead of a crucial $120 million interest payment. It included $200 million in commitments that are subject to certain conditions and a $400 million first-in, last-out asset-based credit facility, carved out of the company’s $1.8 million asset-based facility.
Related Articles
But $100 million of the FILO facility included an exchange of some of the $2.2 billion in senior secured bonds the company sold in December to buy Neiman Marcus Group.
You May Also Like
S&P described the financing arrangement as “tantamount to a default” as the bondholders “will receive less value than they were initially promised and will rank lower in terms of priority than the new money notes.”
The rating agency said it expects to lower its rating on Saks to “selective default” or “default” if the company goes through with the financing.
When credit ratings are moved into default because of debt exchange, they often bounce back quickly.
While going into default is not a good look for a company’s finances, it is a distinction that lives mostly in finance circles and is not expected to alter Saks’ plans or its ability to pay vendors.
The company’s also been finding extra money in operations as it integrates Neiman Marcus.
“We have both significantly accelerated our plans for synergy capture and increased our expected annual cost reduction to $600 million over the next few years,” Saks noted to WWD in a statement.
The value of Saks’ bonds have already been re-rated in the market, where they have traded as low as 34 cents on the dollar in May and have recently been trading at 51 cents.
But the credit rating switch is a sign of just how much work Saks still has to do as it integrates Neiman Marcus, cuts costs, reestablishes itself with vendors and looks to grow with a new shop on Amazon.
Although Saks was slow to pay vendors over the last couple of years, it has lately been said to be making its payments and is in the process of making good on past due bills.
It will need to keep that flow of goods moving to perform its reset.
“A disruption in Saks’ inventory flow has led to a pronounced deterioration in its operating performance and liquidity challenges,” S&P said in its downgrade. “Overdue payments, borrowing base constraints, and seasonal inventory-building led to a decline in the availability under the company’s $1.8 billion asset-based lending facility to $415 million as of Feb. 1. In addition, Saks reported a free operating cash flow deficit of $517 million in 2024.”
And S&P said Saks Global’s market position “will weaken as competitors with greater financial capacity expand their business operations.”
“We forecast the company will report negative free operating cash flow over the next two years and continue to heavily rely on its ABL facility,” S&P said. “While Saks has real estate assets worth over $4 billion on a net basis, it has been unable to monetize them in a timely manner to meet its financial commitments.”
Marc Metrick, chief executive officer of Saks, prepped vendors for the S&P switch in a letter on Wednesday that was obtained by WWD.
“Recognizing that the media continues to actively cover Saks Global, I also wanted to take this opportunity to give you a preview of some developments we expect in the near term that may generate attention,” Metrick wrote. “Of the up to $600 million of committed financing, $300 million was funded at the end of June. The next step with respect to the balance involves a bond exchange offer, which will launch in the coming days and is expected to be completed in August. There will be highly technical press releases issued at various times during the exchange offer, per legal requirements.
“As a result of the exchange transaction, S&P Global, a credit rating agency, recently issued an update on Saks Global. It is common and expected for S&P to issue an update on companies following the announcement of a financing transaction like we announced in late June. As part of this, S&P applies a formulaic and technical criteria when analyzing these transactions, which has led to a downgrade of Saks Global’s credit rating. Additionally, when the bond exchange closes, we also expect S&P to apply what the rating agency refers to as a ‘selective default,’ which is also common for transactions of this nature.”
Metrick said the company will soon be sharing its first-quarter results with bondholders and an update to its partners.
“You can expect us to focus on the fact that with the bolstered liquidity that the new financing provides, we will be even better positioned to execute on our strategy and capture significant growth opportunities within the luxury market,” he said.