And now, the main event…

To finance its acquisition of Neiman, Saks Global issued the $2.2 billion senior-secured junk bond, underwritten by Jefferies, with help from Bank of America, Citigroup, and Morgan Stanley. The ubiquitous Michael Klein was the lead financial advisor to Baker on the merger, and his firm, M. Klein & Company, was also an equity investor, along with Amazon, Salesforce, Authentic Brands Group, and G-III Apparel Group, among others. The new equity investors joined with Baker’s existing equity investors, including the Rhône Group—run by my old Lazard buddies Steve Langman and Robert Agostinelli—and the Abu Dhabi Investment Council. All told, the idea was to raise more than $1 billion of new equity for the deal, along with the bond offering, plus a $1.8 billion asset-backed lending facility. The bond offering last December was a blowout, and increased in size to $2.2 billion from $2 billion as a result of investor demand. It’s not hard to see why. The interest rate on the bond was 11 percent, senior, and secured by the company’s assets. At the time, the yield on the average junk bond was 7.25 percent, while the yield on the 10-year Treasury was about 4.5 percent. Offering investors an 11 percent senior secured bond represented a tasty spread. But there was also obviously plenty of risk in owning this particular security. S&P Global, the ratings agency behemoth, gave Saks Global a credit rating of CCC+, solidly in junk-bond territory and indicative of its post-deal “unsustainable” capital structure—which, in S&P’s view was “highly dependent on favorable business, economic, and financial conditions, including significant synergies from the proposed acquisition.” And that was before Trump kicked off his tariffpalooza. S&P figured the company’s leverage ratio in 2025 would remain “very high”—in the mid 9x debt-to-adjusted EBITDA range. The ratings agency also expected a free operating cash flow loss of $130 million in 2025, on revenue somewhere in the vicinity of $7 billion, and doubted whether Saks’ EBITDA in 2025 would be sufficient to cover its interest expense, “which highlights risks of less-than-expected synergy generation that could eventually lead to liquidity pressure.” Saks is a private company, with a big, publicly traded debt issue. But while the debt is public, its financial statements are private, and Saks does not make any filings with the S.E.C. Its bond prospectus is not publicly available, either, which is a bit odd, given the size of the offering and prominence of the company. I asked for a copy of the prospectus so I could see what it had to say about the pro forma earnings of the Saks-Neiman combination, but Nicole Schoenberg, Saks’ head of communications, said it was available only to prospective accredited institutional investors, not me. “Baker’s next retail train wreck will be the Saks/Neiman Marcus merger,” Cohen predicted. “Two luxury players limping along trying to make the case that the combination will be accretive.”

The first whiff of trouble emerged on Valentine’s Day. That’s when Marc Metrick, the Saks Global C.E.O., wrote a letter to company vendors informing them that Saks would henceforth pay them after 90 days, rather than the customary 30. “Stretching payables,” as this tactic is known on Wall Street, is sometimes (but not always) indicative of emerging financial difficulties. Furthermore, Metrick wrote that Saks would not pay its overdue bills to vendors until July, and would pay them off in 12 monthly installments. “It was the letter heard around the world,” Lauren observed. Vendors were outraged. Metrick, Lauren reported, insisted that the change was not a “threat” but rather “an excruciatingly necessary reorganization required to reset the relationship between brands and retailers.” In a subsequent interview with Lauren on her podcast, Metrick said that,“for the longevity of the model,” Saks had to make changes to its payables. He claimed the company was “well capitalized” but, “we had to look at how much should be going out at once,” and how to “handle all the different invoices that are there.” To my mind, these were more warning signs, despite Metrick’s calm logic. He said he wrote the letter for “transparency” reasons, so that vendors, including those owed money and those about to ship more goods to the company—whether to Saks, Neiman, or Bergdorf—would know the new terms of engagement. “If I had to do it all over again, I would do it,” he told Lauren. Metrick said he didn’t expect Saks’ vendors to finance Saks’ business. “It’s not their job,” he said. “But, I can’t finance theirs either. We have to be partners. And I think this is a movement more toward that. By and large, our brand partners understood that.” (He also confirmed Lauren’s reporting that some vendors, such as Chanel, got “different deals,” and would get paid on better terms than others.) In March, Saks confirmed the rumors that it intended to close the flagship Neiman Marcus store in downtown Dallas, after 111 years. After some pushback, Metrick agreed at the eleventh hour to keep the location open through the 2025 holiday season, and to potentially reimagine the space as a center for events and fashion innovation. “This is not a well-performing store,” Metrick told Lauren. Needless to say, none of these developments were particularly good news for the Saks bondholders, most of whom paid close to 100 cents on the dollar for their bonds last December. Pretty much from Inauguration Day, the price of the bonds has been falling. Then came Liberation Day, and the bonds tanked. As of Good Friday, the bonds were trading at 72 cents on the dollar, meaning the people who paid 100 cents on the dollar have lost 28 percent of their money in about four months. Even though they are legal obligations, bonds can be very risky, too—as S&P Global warned from the start about the Saks offering. The Saks bonds, which had an 11 percent yield in December, are now yielding more than 20 percent—an 81 percent increase. Put another way, investors are demanding a yield on par with the interest on a Capital One card. The implications of creditors demanding an equity-like yield on a senior, secured piece of paper are well-known to investors. It could signal concern about an imminent payment default, a debt restructuring of some sort, or that the equity value of the company is in the process of being wiped out. After all, if the debt is not worth par—or 100 cents on the dollar—it’s hard to make the argument that the company still has equity value. “Is 20+ percent enough for bondholders to stay the course?” Cohen wondered. “I doubt it.”

No surprise, Saks Global sees things differently. According to a statement that the company shared with me, “Tariffs have negatively affected the value of equity and bonds recently, including our bonds. Following our late-December acquisition of Neiman Marcus Group, we are in the early stages of solidly executing on our strategy for the combined business, including capturing significant synergies over the next few years, improving inventory flow, which is currently approaching fiscal 2023 levels, and establishing new payment terms to reset the working capital model. All of these plans were shared with our bondholders when the bonds were issued, and we are confident in our ability to continue to execute against them.” For his part, Metrick is bullish about the prospects for the combination of Saks and Neiman Marcus. He told Lauren that Saks would, without “caveat,” be paying its vendors the money it owes them by this December. He said he hoped to “transform” Saks into “something new” and that “people are going to start to get very excited about it.” But he also conceded that he’s been around a long time and has lived through multiple upheavals, including the bursting of the dot-com bubble in 2000, September 11th, and the Great Recession. “Our business is filled with insecure, paranoid people,” he said. “The one lesson I’ve learned is that luxury is a long game.” Trump’s tariffpalooza has affected the business, of course, but it won’t be the only thing, he predicted: “It’ll be something else. It might be killer bees. It might be the tidal shifts. I have no idea what’s going to be happening two years from now or three years from now.” But when your bonds are yielding 20 percent a mere four months after the closing of your big strategic merger, things can spin out of control pretty quickly.

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