When Neiman Marcus filed for chapter in Could it felt like an American tragedy. The closure of the 113-year-old luxurious division retailer chain had been triggered by lockdowns to manage the coronavirus pandemic, leaving its 14,000 staff on furlough. There was concern amongst collectors and lenders {that a} long-drawn out Chapter 11 course of may result in the retailer’s liquidation.
But, for one hedge fund supervisor the court-supervised course of represented a possibility. Dan Kamensky, the founding father of a small hedge fund, Marble Ridge Capital, had spent the earlier two years brawling with Neiman’s homeowners, Ares Administration — a $165bn California asset supervisor — and the Canada Pension Plan Funding Board.
Mr Kamensky had no real interest in taking on Neiman Marcus. Relatively his grievance was over a advanced debt restructuring in 2019 the place he claimed that the chain retailer’s homeowners had improperly seized the corporate’s prized asset, on-line retailer MyTheresa, away from collectors.
Ares and CPPIB noticed taking management of MyTheresa as a transfer that might allow Neiman’s shareholders and its collectors to salvage a minimum of some worth from an in any other case disastrous $6bn leveraged buyout. However the transfer, claimed Mr Kamensky, had cheated collectors. His marketing campaign, nevertheless, had gained little traction. Now with Neiman in entrance of a federal chapter choose he noticed a recent probability to make his argument in courtroom.
The 47-year-old former lawyer had assembled a case not simply targeted on what he believed was the abuse of collectors by non-public fairness companies. Mr Kamensky additionally wished to shine the sunshine on what he mentioned have been systemic issues, the place high legislation companies and funding banks labored with buyout teams to crush lenders and bondholders who in any other case ought to have change into the rightful homeowners of failed corporations.
By late July, a Houston chapter courtroom had aired his allegations that Ares and CPPIB had fraudulently transferred MyTheresa away from collectors. Two separate court-ordered investigations discovered a minimum of “viable” claims of fraudulent transfers. And Mr Kamensky had helped wring out a $172m settlement for junior Neiman collectors together with the likes of Estee Lauder and Chanel.
The victory was shortlived. At 6am on September 3, FBI brokers arrested Mr Kamensky at his suburban New York dwelling on suspicion of fraud, extortion and bribery after he was accused of pressuring a rival to not bid for belongings gained within the settlement so Marble Ridge may purchase them at a less expensive value. Previous to the prison allegations, Mr Kamensky admitted to Division of Justice investigators that by making an attempt to affect a rival bidder he had made a “grave mistake”.
The arrest shocked Wall Road. And whereas his plight has elicited little sympathy, Mr Kamensky’s campaign over non-public fairness aggression has struck a chord with many within the distressed debt market. Collectors like Marble Ridge for years had been complaining about how buyout companies with stakes in corporations similar to Toys R Us and J Crew had been pushing authorized and moral boundaries to keep away from having their investments worn out.
Mr Kamensky, maligned directly by the homeowners of Neiman Marcus and shunned by some fellow collectors, had been the uncommon hedge fund supervisor keen to show the ugliness of the non-public fairness/hedge fund wars. That has now been overshadowed by his personal misbehaviour.
“There was a way that non-public fairness companies wanted to care for the lenders that funded their LBOs,” says Jared Ellias, a former chapter lawyer who’s a professor on the College of California, Hastings. “Now, they do not appear to care in any respect they usually haven’t any qualms about burning their lenders actually badly.”
The $6bn LBO
Anthony Ressler made his title as a junk bond banker at Drexel Burnham Lambert within the 1980s. After Drexel’s chapter he and Leon Black — his brother in-law — joined forces to kind Apollo World Administration. In 1997, Mr Ressler departed Apollo to kind his personal funding firm named after the Greek god of battle, Ares, a sibling of Apollo.
In 2013, Ares introduced, in partnership with CPPIB, its acquisition of Neiman Marcus for $6bn. It was one of many largest leveraged buyouts for the reason that monetary disaster. But the 2 funding teams had put in lower than $1.5bn mixed of the Neiman Marcus buy value and by 2017, the retailer was struggling below the burden of almost $5bn of buyout debt with gross sales and revenue in regular decline.
By 2018 it wished to refinance its money owed. However by September of that 12 months the hole between the homeowners and collectors — Neiman was asking them to simply accept huge losses to the face worth of their holdings — was so giant that the talks collapsed. Chapter appeared inevitable. However that might have worn out Ares and CPPIB. As an alternative the duo seemed for an alternate. In 2014 Neiman had purchased a promising German ecommerce retailer, MyTheresa.com, for $200m. It was a hedge towards the declining bodily retail gross sales at its 42 shops.
MyTheresa was nearly doubling income each two years and by 2019 it had an estimated valuation of a minimum of $500m. Nearly two years earlier in March 2017 whereas MyTheresa was prospering, Neiman and its advisers had made a seemingly esoteric transfer. Benefiting from bond and mortgage paperwork that every one sides agree had been loosely written, Neiman designated the net enterprise as a so-called “unrestricted subsidiary”, ending any oversight collectors had over MyTheresa. It was an unremarkable transfer, the importance of which solely grew to become obvious in September 2018 with the collapse of the refinancing talks.
With $3bn of debt falling due in 2020 Ares and CPPIB have been dealing with a Neiman chapter. At this stage, non-public fairness teams typically stroll away, settle for their losses, and hand over the keys of an overleveraged firm to collectors. However in an period of covenant-lite and covenant free debt — the place corporations are capable of keep away from defaults — Ares had an alternative choice. With MyTheresa now an unrestricted subsidiary, the unit was the bargaining chip that Neiman wanted to maintain its funding alive. Neiman, in September 2018, shifted MyTheresa right into a unit the place collectors now not had a declare on it: it was now the only real property of Ares and CPPIB.
After saying the switch, the 2 homeowners known as again the creditor factions and advised them that Neiman would now wish to resume refinancing talks. Over the following 5 months, the perimeters clawed their method to a deal that pushed out Neiman’s most imminent debt maturity to 2022. Within the debt alternate, current lenders would swap into new loans at larger rates of interest and obtain some money for his or her current holdings. Unsecured bondholders would swap into secured notes. New bonds could be bought to lift recent money. And crucially, Ares and CPPIB would hand again the primary $450m in worth of MyTheresa to these bondholders.
Privately lots of the Neiman collectors have been livid. But, nearly all of them received on board with the deal. There was just one main holdout: Mr Kamensky.
Restructuring resistance
In September 2018, Mr Kamensky wrote a public letter blasting Neiman Marcus for snatching MyTheresa whilst different collectors have been making an attempt to chop a deal. He wrote that the aim of the switch was to “strip an vital and priceless asset away from collectors of the corporate and to reward that asset to Ares and CPPIB”. He later filed a lawsuit in Texas towards Neiman Marcus, accusing its non-public fairness homeowners of executing an “intentional fraudulent switch” of MyTheresa.
Sceptics, together with some fellow collectors, believed Mr Kamensky was showboating to lift his personal profile and that of his hedge fund when a compromise deal was doable.
Having begun his profession as a restructuring lawyer at Sidley Austin, Mr Kamensky then made his title as a distressed debt investor at hedge fund Paulson & Co. He was a part of a staff that invested in Caesars Leisure, the place collectors secured a $6bn settlement pursuing fraudulent switch claims towards the on line casino chain’s non-public fairness homeowners.
By the point the chapter proceedings had began Ares and CPPIB had struck a deal handy over the retail chain to its senior lenders similar to Pimco and Davidson Kempner, leaving junior collectors to obtain simply cents on the greenback. However Chapter 11 allowed all stakeholders to have a voice, even bit-part gamers like Marble Ridge which owned simply $60m in Neiman debt.
In courtroom paperwork, Mr Kamensky, alleged a broad conspiracy across the MyTheresa switch, accusing legislation agency Kirkland & Ellis and funding financial institution Lazard of giving improper cowl to Neiman. The 2 companies have been employed as restructuring advisers by the retailer in 2017 and helped design the MyTheresa switch and subsequent refinancing. Neither agency responded to a request for remark. However in courtroom paperwork, Neiman insisted the MyTheresa transactions had been crafted correctly, with the assistance of “main monetary advisers” and “world class legislation companies”.
Mr Kamensky wrote in a courtroom paper that “Kirkland and Lazard should not able and can’t be anticipated to impartially examine, analyse and probably problem transactions that they themselves designed, applied and subsequently took steps to insulate, all for the unique good thing about the LBO sponsors [Ares and CPPIB].”
At a courtroom listening to in Houston in late Could, Marble Ridge argued for an unbiased investigation into the MyTheresa transaction. However few anticipated something to derail an environment friendly chapter as Neiman Marcus was racing to keep away from a liquidation. And Mr Kamensky didn’t have the total backing of different collectors.
Marc Beilinson, a Neiman unbiased director, then testified. He sought to reassure the courtroom that an investigation he was conducting into MyTheresa would look into Mr Kamensky’s claims. However he stumbled horribly when Decide David Jones requested him to clarify his job as an unbiased director.
Decide Jones later mentioned in courtroom that “what he [Beilinson] gave me was a line of bull. And I don’t recognize it . . . I count on transparency, I count on forthrightness, and I received neither as we speak from him . . . I don’t need to see a fiduciary to this property ever seem in entrance of me once more unprepared, uneducated and borderline incompetent. By no means.”
Mr Kamensky had criticised the governance of Neiman Marcus, accusing administrators of being well-paid stooges for Ares and CPPIB. The testimony of Mr Beilinson — who mentioned in courtroom that he had served as a director at round 20 completely different corporations over his profession together with a number of that have been distressed or in chapter — appeared to vindicate a few of that criticism.
His lack of ability to clarify his position shone an uncomfortable mild on administrators in non-public equity-owned companies who’re sometimes recruited by legislation companies. Nearly all are retired attorneys, bankers, traders or executives on the lookout for a profitable however typically untaxing job. They’re typically seen by critics, as dependable rubber-stamps for personal fairness companies.
After the Beilinson testimony a courtroom ordered investigation performed by a committee of unsecured collectors — together with Mr Kamensky — concluded in July that Neiman Marcus was deeply bancrupt on the time of the switch of possession of MyTheresa. It mentioned Ares and CPPIB had “pilfered a minimum of lots of of tens of millions of {dollars} of worth” within the MyTheresa transaction.
The insolvency discovering carried a disturbing implication. If right, it will imply that the corporate’s administrators — together with independents — had a broader fiduciary responsibility to collectors along with simply shareholders on the time of the switch. This raised the query of whether or not they need to have blocked the no-value MyTheresa switch. Lazard and Kirkland & Ellis had helped form Neiman’s view, in line with the report, that it was solvent in 2018 — whilst its debt was buying and selling for 62 cents on the greenback.
Kamensky overplays his hand
Ares dismissed the collectors’ committee report as a biased, pre-determined hit job. However after Mr Beilinson give up, Scott Vogel, the opposite unbiased director and a veteran distressed debt investor, performed his personal inquiry. He wrote to the courtroom in late July that the reorganised Neiman firm holds “viable claims based mostly in constructive fraudulent conveyance as a result of the corporate was possible bancrupt on the time of the [MyTheresa] distribution”.
Mr Kamensky’s doggedness, as soon as dismissed as futile, had paid off. In alternate for being launched from additional authorized legal responsibility and ending the dispute, Ares and CPPIB agreed to offer again $172m to unsecured collectors, largely in MyTheresa most well-liked inventory.
Realising that lots of the different junior collectors could be tired of taking MyTheresa fairness and ready years for Neiman to promote it, Mr Kamensky believed he may wring some additional revenue from the chance he had created. So he supplied to purchase out different collectors for 20 cents on the greenback.
After discovering that the funding financial institution Jefferies was additionally contemplating a bid — one larger than his — for the MyTheresa shares, Mr Kamensky known as the funding financial institution threatening to cease doing enterprise with Jefferies, the place he was a consumer, in the event that they received in his approach. Having spent almost $4m combating Neiman Marcus, he defined, that he was decided to benefit from the spoils. In chat messages despatched by Bloomberg terminals, Mr Kamensky used intimidating language — “DO NOT SEND IN A BID” learn certainly one of them, in line with an investigation revealed by the Division of Justice. Jefferies later reported Mr Kamensky’s actions to different collectors.
“I’m sorry to see the ugly flip of occasions,” says Sara Tirschwell, a longtime distressed debt investor who had as soon as deliberate to enter enterprise with Mr Kamensky. “However glad that Dan lastly uncovered the dangerous religion schemes that non-public fairness sponsors use to maintain belongings out of attain from collectors”.
Ares insists that the MyTheresa transaction was above board and was designed to maximise worth for all stakeholders in Neiman Marcus. The agency has identified that it had by no means taken any charges or dividends out of the retail enterprise or missed a principal or curiosity cost to collectors. And within the 2019 refinancing transaction, Ares had invested one other $100m that now has been largely misplaced — additional proof, its supporters argue, that it believed the corporate was solvent and acted in good religion.
Neiman Marcus exited Chapter 11 in late September at only a $2bn valuation. MyTheresa stays a separate firm. Marble Ridge is within the means of dissolving its operations. And whereas the $172m for unsecured collectors stays in a belief, Mr Kamensky — whose marketing campaign wrung the cost out of Neiman Marcus — is making an attempt to keep away from jail.
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