Neiman Marcus Group is considering selling itself, in a move that some investors fear could be disastrous for the company's credit quality. But investors positioning for potential deterioration should take only small positions, because there's a solid chance that in coming months concerns about Neiman Marcus' credit quality will prove completely unfounded, traders said.
The cost of protecting Neiman Marcus' debt against default jumped to 125 basis points on Friday from 40 basis points on Wednesday when the company said it is considering selling itself and had hired Goldman Sachs & Co as its financial adviser.
At current levels, protecting the company's debt costs $125,000 a year for every $10 million of principal protected in the credit derivatives market.
That level could easily double or triple if the company sells itself to leveraged buyout firms, as Toys R Us did on Wednesday, a trader said. There is a good deal of leveraged buyout money chasing after acquisitions now, he added.
If the company sells itself to a highly rated retailer, the cost of protection could fall by 60 percent.
With the potentially high reward and much smaller risk, it may make sense to buy protection on the credit, said a trader who had done so.
But another trader cautioned that any position taken in Neiman Marcus Group should be small, because there is a good chance the company's spreads will narrow.
The retailer may not sell itself at all, he noted, and although leveraged buyout firms have been active in the market recently, they tend to look for undervalued companies in the middle cyclical downturns.
Neiman Marcus, on the other hand, has had six straight quarters of double-digit sales increases at stores open more than a year, with profit in its second quarter ended January 29 up on fewer mark-downs, cost controls and better inventory management.
Luxury retailers and discount stores like Target Corp have been the best-performing retailers for the last several years.