Claire's gains momentum; Neiman higher; distressed debt sees 'hard, fast' run-up, source says

By Stephanie N. Rotondo

Portland, Ore. Sept. 10 - Claire's Stores Inc. was the nom du jour in Thursday's distressed debt marketplace.

The value retailer reported its second-quarter results during the session and the numbers beat market expectations. As a result, the company' s capital structure got a boost.

Meanwhile, Neiman Marcus Group Inc.'s paper continued to firm. The luxury retailer had reported its fourth-quarter results on Tuesday.

With the market holding its upward course, it seems that there is a lack of so-called distressed debt, or at least that there is little interest. But according to one market player in the know, that is not the case. In an interview with Prospect News, the source points out just where the opportunities are.

In discussing the overall feeling of the day, another source touched on the level of interest in the secondary world.

"More dollars continue to come into the marketplace," the source said, adding that investors were starting to show "less fear and more risk-taking."

Claire's debt gains momentum

Claire's Stores' debt was one of the day's most active traders, market sources reported. The action came after the company reported its second-quarter results, which beat market expectations.

One trader said about "$40-odd million" of the 9 5/8% notes due 2015 traded at 48.5 bid, 49 offered.

"That's up," he said.

Another trader placed the issue at "49 and change," versus levels on Wednesday around 42.

"So they're up several points," the trader said.

Meanwhile, Claire's term loan B gained some ground, according to traders.

The term loan B was quoted by one trader at 70½ bid, 71½ offered, up from 66¾ bid, 67¾ offered, by a second trader at 71 bid, 72 offered, up from 67 1/8 bid, 68 1/8 offered, and by a third trader at 70 bid, 71 offered, up from 67 bid, 68 offered.

For the quarter, the company reported a net loss of 3.7 million, versus a net loss of $16.9 million in the second quarter of 2008.

And net sales for the quarter were $314.2 million, down 12.7% from $360 million in the comparable period last year.

Claire's also reported adjusted EBITDA for the second quarter of $50.5 million, compared with $58.1 million in the prior year.

"While we continue to feel the effect of a challenging retail environment as well as the impact of negative consumer confidence, our second quarter sales performance had monthly sequential same store sales improvement," said Gene Kahn, in a news release.

"While it is difficult to compare our third quarter performance at this point, because of various changes in the calendar, our quarter to date same store sales are in the negative low single digits. Looking forward, we see no reason to believe the retail environment will see significant near-term improvement and, therefore, will continue to focus on controlling expenses and maximizing available sales while generating positive free cash flow," Kahn added.

Claire's had $5.9 million of capital expenditures during the 2009 second quarter, of which $4.3 million related to new store openings and remodeling projects, compared with $16 million of capital expenditures during the second quarter 2008.

At Aug. 1, cash and cash equivalents were $182.4 million, and $194 million continued to be drawn on the company's revolver.

As previously disclosed, the company drew the full available amount under the facility during the 2008 third quarter in order to preserve the availability of the commitment because a member of the facility syndicate, Lehman Brothers, filed for bankruptcy.

The agent bank has not yet found a replacement for Lehman Brothers in the facility syndicate, or arranged for the assumption of Lehman Brothers' commitment by a creditworthy entity.

The company said in the earnings release that it will continue to assess whether to pay down all or a portion of this outstanding balance based on various factors, including the creditworthiness of other syndicate members and general economic conditions.

Claire's is a Pembroke Pines, Fla.-based specialty retailer of value-priced fashion accessories and jewelry for girls and young women.

Neiman notes moving higher

Also in the retail space, Neiman Marcus Group's bonds continued to firm following the release of the retailer's financials earlier in the week.

One market source saw the bonds gaining about a point, the 9% notes due 2015 at 77 bid, 78 offered and the 10 3/8% notes due 2015 at 77.75 bid, 78.25 offered.

Another source pegged the 10 3/8% notes at 77 bid, 78 offered, calling that "up a few points from yesterday."

Yet another source saw the issue climbing about 1.5 points to 77 bid.

On Tuesday, Neiman reported its fourth-quarter results. For the quarter ending Aug. 1, revenues declined to $768 million from $1.03 billion the year before. Net loss widened to $168.6 million from $35.7 million in the same quarter of 2008. The larger loss was attributed to non-cash pre-tax impairment charges totaling $174.4 million.

Neiman ended the fiscal year with $323 million in cash, $84 million above the cash levels seen at the end of fiscal 2008.

"Fiscal year 2009 was a very challenging year for our company," said Burton M. Tansky, chairman and chief executive of the Dallas-based retailer, in the earnings release. "We quickly began addressing the many challenges we faced due to the sharp decline in our business, precipitated by the downturn in the economy.

"I am extremely proud of our team and what we accomplished in this very difficult year," Tansky added. "I am confident the significant actions we have taken, combined with our outstanding customer relationships and the strength of our marketing initiatives, will position us well for the new year."

Distressed interest is there: source

The distressed market has seen a significant influx of new names under its umbrella, as the downturn on the economy resulted in an increase in defaults, or in some cases, near-defaults. But as the economy started to turn around and cash began to flow again, it experienced what one market player called a "hard and fast" run-up.

What, then, does that mean for the distressed debt marketplace now and in the near term?

"I think it's very difficult to tell," said the source, a buysider at a distressed debt investment firm. With the "hard and fast" run-up, "it's difficult to have conviction in a lot of stuff."

"On the other hand, we have never seen this kind of monetary easing" on a global level.

"The market could continue to have some legs to it," the source opined, noting that he foresaw a "six- to 12-month bear market rally."

"But that doesn't mean there are not opportunities in distressed," he said.

The key is to find those credits that have some sort of catalyst, rather than "market-driven" names. For example, he pointed to companies doing distressed exchange offers, such as CIT Group Inc. Or, the catalyst could be litigation-related, such as Washington Mutual Inc.

"Of course, you have to bet on the right side of that litigation," he noted.

And, the source believes that there are plenty of investors interested in the distressed arena.

"Hedge funds that positioned properly on the long side have done very well and attracted capital," he said. And while hedge funds continue to be interested in the distressed space, investors interested in participating with said hedge funds have also thrown their hat into the ring.

One thing the source pointed out was the uptick in hiring at distressed desks on both sides of the Street. That, he said, indicates the interest is there.

Broad market stronger

In the broader market, Wells Fargo & Co.'s 5.8% notes due 2049 inched up to the 67.5 "kind of range," according to a trader.

The trader also saw Capmark Financial Group Inc.'s bonds at 21 bid, 22 offered, calling that "right where they have been." But another source pegged the notes at 22 bid, 22.5 offered, up 2 points.

Idearc Inc.'s 8% notes due 2016 might have been the day's only weaker name, according to one source. He said the bonds traded down as much as a point at 5.875 bid, 6.25 offered, on $15 million to $20 million traded.

Sara Rosenberg contributed to this article.

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