Now, on to Saks…

Lauren Sherman: In December, you noticed something about the Saks Global debt that you flagged with me. Bill Cohan: There was a period of euphoria in the markets after Donald Trump’s reelection, when people on Wall Street bulked up by hiring more M&A advisors. They really thought the deal business was going to take off and the regulators were going to take off their spectacles and let everything fly. There was this sense that, Oh my God, this merger is going to be so fantastic, so we’ll do this $2 billion high-yield, senior secured, effectively junk bond offering. Jefferies underwrote it, and either they shoved it down the throats of their institutional investors, or institutional investor demand was so strong that they upped the size of it from $2 billion to $2.2 billion. Of course, it carried a whopping coupon of 11 percent, which really got everybody’s attention. It struck me as wild at the time. And pretty much right out of the gate, the thing traded like shit. When did you start poking around and looking at how the bond was trading? Around the time of your Valentine’s Day massacre stories. Anytime you see payables going from 30 days to 90 days—I worked on the Allied/Federated Bankruptcy in the early ’90s, which was, I think, the largest bankruptcy ever at that point. I worked on the Revco bankruptcy before that. So when you see that happening, stretching payables, that’s a red flag on Wall Street. So I was wondering, what’s the yield on the bonds now? How’s it trading? It was trading at par, 100 cents, when it was issued, and the interest rate was 11 percent. But the bond was trading down and yielding more than 20 percent. Now I think it’s yielding more than 30 percent. So people are basically saying, This is so risky that I need to be paid a whole lot of money to buy this thing. And when you start seeing trading like that, especially in retail, it can be a self-fulfilling prophecy, and a vicious cycle down—which, to some extent, it has been. Since then, they’ve hired restructuring advisors, legal and financial, on both creditors’ side and the company’s side—which, again, is a leading indicator. I’ve dug into the indenture related to the asset-based lending credit line about whether or not they can use their inventory and receivables facility to pay for general corporate purposes, which would allow them to make this $130 million interest payment on the bond in June. Believe it or not, I guess they can do that. If I were advising them, I would seriously consider not making that bond payment. You could use a Trump-like “next 60 days,” suspending things, and see if you can cut a deal with your bondholders about converting some of that debt to equity, and alleviating some of the pressure. But I suspect what they’ll do is use that ABL line to make that interest payment. They’re not Elon Musk. Musk was paying interest on the ex-Twitter debt out of his own pocket because the company couldn’t sustain those interest payments. Jeff Bezos could step up and make those interest payments if he were so inclined, but I’m sure he’s not going to do that. (Amazon is an investor.)

The other thing due in June are the payments for the first 90-day cycle. That’s going to be tens of millions, maybe hundreds of millions of dollars. How will they pay that? Well, that can come directly from the ABL line, because it’s paying for inventory. And as Debtwire pointed out, they also have this commercial mortgage-backed security, based on a joint venture with the Simon Property Group that they own 62 percent of. It’s a bunch of old Lord & Taylor land, some empty stores, some Saks stores—that has to be repaid. They’re going to refinance it, probably, and they’ll probably succeed at refinancing it. But the question is whether the value of the underlying assets has declined sufficiently that they can refinance only a fraction of the outstanding amount, and they then have to make up the balance with equity from the two partners, which could cost Saks another $100-plus million. They’re going to start looking like Saint Sebastian, with all the arrows coming into them. That’s why I would not make this bond payment, or [I’d] get forbearance for 30 days, to see if I could cut a deal with bondholders. Do you think they will start paying these back-payments in July, as they have promised? Our buddy Mr. Metrick has promised that. Why can’t they just sell a couple buildings? You need sophisticated restructuring lawyers who can read those indentures and figure out the sale of assets. If they’re pledged as collateral to secure those bonds, then I’m not sure they can just out-and-out sell them. Why does this happen? Is it just that these retailers tend to be overleveraged? Why do investors keep betting on them? As you said, this has been a tough business for a very long time. We didn’t even touch on the fact that Richard Baker–owned Hudson’s Bay is literally in the process of being liquidated as we speak. Richard Baker is acting like everything’s okay with Saks Global, though. Of course, they have to act like everything’s going to be fine. Never admit to any problem—until you basically have no choice. The market is speaking. The winners here, ironically, were probably the Neiman Marcus creditors, hedge fund creditors—I don’t know what they bought their stakes for, either in bankruptcy, or out of bankruptcy, or before bankruptcy, or whatever—but they got $2.7 billion in cash last December. So they’re sitting pretty.

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