Aurelius Capital Management helped push Neiman Marcus Group Inc. to tweak its proposed debt swap in ways that could create a windfall later on for investors betting on a default, according to people with knowledge of the matter.
Neiman Marcus wants creditors to sign on to a bond exchange that would ease the retailer’s immediate debt burden and end a dispute over the company’s recent asset-shuffling. But Aurelius, the hedge fund led by Mark Brodsky, and Jeffrey Altman’s Owl Creek Asset Management asked the retailer to include language that lists Neiman Marcus Group Ltd. LLC as a co-borrower on the proposed exchange’s new debt, the people said.
The change would make the new bonds obligations of that entity as well as Neiman Marcus Group LLC, and thus widen the pool of debt tied to credit derivatives that pay off for investors if the company defaults. Aurelius and Owl Creek signed on to Neiman’s proposal after the concessions were included, the people said, asking not to be identified discussing private negotiations.
Representatives for New York-based Aurelius and Dallas-based Neiman Marcus declined to comment. Representatives for Owl Creek, also based in New York, didn’t immediately return messages.
Neiman’s proposed debt swap is the latest in a string of examples of how the $10 trillion credit derivatives market can affect a company’s debt restructuring and perhaps its survival. In recent years, traders who seek to profit from derivatives have helped get cash for struggling grocers, newspaper chains, homebuilders and even bankrupt Sears Holdings Corp. But Neiman’s added language is stoking concern among other creditors, one of the people said, because derivatives holders can have an incentive to push the company into a default.
Aurelius holds positions in the company’s term loan and bonds, and came to the negotiation table at the last minute with the provisions that would sweeten the deal for buyers of credit-default swaps, the people said. Neiman Marcus has about $4.8 billion of debt, and there are about $255 million of outstanding CDS wagers on the company.
But because of a quirk in the market, there are more CDS with side bets on the company’s credit-worthiness than bonds tied to those derivatives, which depresses the value of the swaps. The revised terms favored by Aurelius and Owl Creek would widen the pool of bonds and potentially boost CDS payouts.
At the time the tentative deal was disclosed, the upfront cost to insure Neiman’s debt against default for five years more than doubled to $3.3 million per $10 million of debt, according to data provider CMA.
Debtors are often wary of making concessions that appease holders of credit-default swaps, because those investors stand to profit from the company’s demise, and Aurelius has an aggressive reputation in the restructuring world.
It most recently drove the rural phone company Windstream Holdings Inc. into bankruptcy after a federal judge sided with the hedge fund’s argument that the company defaulted on its bonds by spinning off a unit and putting it out of reach of creditors. Windstream has accused Aurelius of forcing it into bankruptcy so the hedge fund could profit on a CDS position. Neiman Marcus’s dispute with its bondholders revolves around concerns about the transfer of its MyTheresa unit.
But in recent years, companies including newspaper chain McClatchy Co. and homebuilder Hovnanian Enterprises Inc. have agreed to take financing from funds that also stood to profit from side-bets in the derivatives market. In Hovnanian’s case, the company even agreed to trigger a default on one of its bonds.
— With assistance by Sridhar Natarajan
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