How a creditor’s crusade against private equity power went wrong

When Neiman Marcus filed for bankruptcy protection in May it felt like an American tragedy. The closure of the 113-year-old luxury department store chain had been triggered by lockdowns to control the coronavirus pandemic, leaving its 14,000 workers on furlough. There was concern among creditors and lenders that a long-drawn out Chapter 11 process could lead to the retailer’s liquidation.

Yet, for one hedge fund manager the court-supervised process represented an opportunity. Dan Kamensky, the founder of a small hedge fund, Marble Ridge Capital, had spent the previous two years brawling with Neiman’s owners, Ares Management — a $165bn California asset manager — and the Canada Pension Plan Investment Board.

Mr Kamensky had no interest in taking over Neiman Marcus. Rather his grievance was over a complex debt restructuring in 2019 where he claimed that the chain store’s owners had improperly seized the company’s prized asset, online retailer MyTheresa, away from creditors.

Ares and CPPIB saw taking control of MyTheresa as a move that could enable Neiman’s shareholders and its creditors to salvage at least some value from an otherwise disastrous $6bn leveraged buyout. But the move, claimed Mr Kamensky, had cheated creditors. His campaign, however, had gained little traction. Now with Neiman in front of a federal bankruptcy judge he saw a fresh chance to make his argument in court.

The 47-year-old former lawyer had assembled a case not just focused on what he believed was the abuse of creditors by private equity firms. Mr Kamensky also wanted to shine the light on what he said were systemic problems, where top law firms and investment banks worked with buyout groups to crush lenders and bondholders who otherwise should have become the rightful owners of failed companies. 

By late July, a Houston bankruptcy court had aired his allegations that Ares and CPPIB had fraudulently transferred MyTheresa away from creditors. Two separate court-ordered investigations found at least “viable” claims of fraudulent transfers. And Mr Kamensky had helped wring out a $172m settlement for junior Neiman creditors including the likes of Estee Lauder and Chanel.

The victory was shortlived. At 6am on September 3, FBI agents arrested Mr Kamensky at his suburban New York home on suspicion of fraud, extortion and bribery after he was accused of pressuring a rival not to bid for assets won in the settlement so Marble Ridge could buy them at a cheaper price. Prior to the criminal allegations, Mr Kamensky admitted to Department of Justice investigators that by trying to influence a rival bidder he had made a “grave mistake”.

The arrest shocked Wall Street. And while his plight has elicited little sympathy, Mr Kamensky’s crusade over private equity aggression has struck a chord with many in the distressed debt market. Creditors like Marble Ridge for years had been complaining about how buyout firms with stakes in companies such as Toys R Us and J Crew had been pushing legal and ethical boundaries to avoid having their investments wiped out.

Mr Kamensky, maligned at once by the owners of Neiman Marcus and shunned by some fellow creditors, had been the rare hedge fund manager willing to expose the ugliness of the private equity/hedge fund wars. That has now been overshadowed by his own misbehaviour. 

“There used to be a sense that private equity firms needed to take care of the lenders that funded their LBOs,” says Jared Ellias, a former bankruptcy lawyer who is a professor at the University of California, Hastings. “Now, they don’t seem to care at all and they have no qualms about burning their lenders really badly.”

The $6bn LBOAnthony Ressler made his name as a junk bond banker at Drexel Burnham Lambert in the 1980s. After Drexel’s bankruptcy he and Leon Black — his brother in-law — joined forces to form Apollo Global Management. In 1997, Mr Ressler departed Apollo to form his own investment company named after the Greek god of war, Ares, a sibling of Apollo.

In 2013, Ares announced, in partnership with CPPIB, its acquisition of Neiman Marcus for $6bn. It was one of the biggest leveraged buyouts since the financial crisis. Yet the two investment groups had put in less than $1.5bn combined of the Neiman Marcus purchase price and by 2017, the retailer was struggling under the weight of nearly $5bn of buyout debt with sales and profit in steady decline.

By 2018 it wanted to refinance its debts. But by September of that year the gap between the owners and creditors — Neiman was asking them to accept big losses to the face value of their holdings — was so large that the talks collapsed. Bankruptcy seemed inevitable. But that would have wiped out Ares and CPPIB. Instead the duo looked for an alternative. In 2014 Neiman had bought a promising German ecommerce retailer, MyTheresa.com, for $200m. It was a hedge against the declining physical retail sales at its 42 stores.

MyTheresa was almost doubling revenue every two years and by 2019 it had an estimated valuation of at least $500m. Almost two years earlier in March 2017 while MyTheresa was prospering, Neiman and its advisers had made a seemingly esoteric move. Taking advantage of bond and loan documents that all sides agree had been loosely written, Neiman designated the online business as a so-called “unrestricted subsidiary”, ending any oversight creditors had over MyTheresa. It was an unremarkable move, the significance of which only became apparent in September 2018 with the collapse of the refinancing talks.

With $3bn of debt falling due in 2020 Ares and CPPIB were facing a Neiman bankruptcy. At this stage, private equity groups often walk away, accept their losses, and hand over the keys of an overleveraged company to creditors. But in an era of covenant-lite and covenant free debt — where companies are able to avoid defaults — Ares had another option.

With MyTheresa now an unrestricted subsidiary, the unit was the bargaining chip that Neiman needed to keep its investment alive. Neiman, in September 2018, shifted MyTheresa into a unit where creditors no longer had a claim on it: it was now the sole property of Ares and CPPIB.

After announcing the transfer, the two owners called back the creditor factions and told them that Neiman would now like to resume refinancing talks. Over the next five months, the sides clawed their way to a deal that pushed out Neiman’s most imminent debt maturity to 2022. In the debt exchange, existing lenders would swap into new loans at higher interest rates and receive some cash for their existing holdings. Unsecured bondholders would swap into secured notes. New bonds would be sold to raise fresh cash. And crucially, Ares and CPPIB would hand back the first $450m in value of MyTheresa to those bondholders.

Privately many of the Neiman creditors were furious. Yet, virtually all of them got on board with the deal. There was only one major holdout: Mr Kamensky.

Restructuring resistanceIn September 2018, Mr Kamensky wrote a public letter blasting Neiman Marcus for snatching MyTheresa even as other creditors were trying to cut a deal. He wrote that the purpose of the transfer was to “strip an important and valuable asset away from creditors of the company and to gift that asset to Ares and CPPIB”. He later filed a lawsuit in Texas against Neiman Marcus, accusing its private equity owners of executing an “intentional fraudulent transfer” of MyTheresa. 

Sceptics, including some fellow creditors, believed Mr Kamensky was showboating to raise his own profile and that of his hedge fund when a compromise deal was possible.

Having begun his career as a restructuring lawyer at Sidley Austin, Mr Kamensky then made his name as a distressed debt investor at hedge fund Paulson & Co. He was part of a team that invested in Caesars Entertainment, where creditors secured a $6bn settlement pursuing fraudulent transfer claims against the casino chain’s private equity owners.

By the time the bankruptcy proceedings had started Ares and CPPIB had struck a deal to hand over the retail chain to its senior lenders such as Pimco and Davidson Kempner, leaving junior creditors to receive just cents on the dollar. But Chapter 11 allowed all stakeholders to have a voice, even bit-part players like Marble Ridge which owned just $60m in Neiman debt.

In court documents, Mr Kamensky, alleged a broad conspiracy around the MyTheresa transfer, accusing law firm Kirkland & Ellis and investment bank Lazard of giving improper cover to Neiman. The two firms were hired as restructuring advisers by the retailer in 2017 and helped design the MyTheresa transfer and subsequent refinancing. Neither firm responded to a request for comment. But in court documents, Neiman insisted the MyTheresa transactions had been crafted properly, with the help of “leading financial advisers” and “world class law firms”.

Mr Kamensky wrote in a court paper that “Kirkland and Lazard are not in a position and cannot be expected to impartially investigate, analyse and potentially challenge transactions that they themselves designed, implemented and subsequently took steps to insulate, all for the exclusive benefit of the LBO sponsors [Ares and CPPIB].”

At a court hearing in Houston in late May, Marble Ridge argued for an independent investigation into the MyTheresa transaction. But few expected anything to derail an efficient bankruptcy as Neiman Marcus was racing to avoid a liquidation. And Mr Kamensky did not have the full backing of other creditors.

Marc Beilinson, a Neiman independent director, then testified. He sought to reassure the court that an investigation he was conducting into MyTheresa would look into Mr Kamensky’s claims. But he stumbled horribly when Judge David Jones asked him to explain his job as an independent director.

Judge Jones later said in court that “what he [Beilinson] gave me was a line of bull. And I don’t appreciate it . . . I expect transparency, I expect forthrightness, and I got neither today from him . . . I do not want to see a fiduciary to this estate ever appear in front of me again unprepared, uneducated and borderline incompetent. Never.”

Mr Kamensky had criticised the governance of Neiman Marcus, accusing directors of being well-paid stooges for Ares and CPPIB. The testimony of Mr Beilinson — who said in court that he had served as a director at around 20 different companies over his career including several that were distressed or in bankruptcy — seemed to vindicate some of that criticism.

His inability to explain his role shone an uncomfortable light on directors in private equity-owned businesses who are typically recruited by law firms. Almost all are retired lawyers, bankers, investors or executives looking for a lucrative but often untaxing job. They are often seen by critics, as reliable rubber-stamps for private equity firms.

After the Beilinson testimony a court ordered investigation conducted by a committee of unsecured creditors — including Mr Kamensky — concluded in July that Neiman Marcus was deeply insolvent at the time of the transfer of ownership of MyTheresa. It said Ares and CPPIB had “pilfered at least hundreds of millions of dollars of value” in the MyTheresa transaction.

The insolvency finding implied that the company’s directors — including independents — had a broader fiduciary duty to creditors in addition to just shareholders at the time of the transfer. This raised the question of whether they should have blocked the no-value MyTheresa transfer. Lazard and Kirkland & Ellis had helped shape Neiman’s view, according to the report, that it was solvent in 2018 — even as its debt was trading for 62 cents on the dollar.

Kamensky overplays his handAres dismissed the creditors’ committee report as a biased, pre-determined hit job. But after Mr Beilinson quit, Scott Vogel, the other independent director and a veteran distressed debt investor, conducted his own inquiry. He wrote to the court in late July that the reorganised Neiman company holds “viable claims based in constructive fraudulent conveyance because the company was likely insolvent at the time of the [MyTheresa] distribution”.

Mr Kamensky’s doggedness, once dismissed as futile, had paid off. In exchange for being released from further legal liability and ending the dispute, Ares and CPPIB agreed to give back $172m to unsecured creditors, mostly in MyTheresa preferred stock.

Realising that many of the other junior creditors would be uninterested in taking MyTheresa equity and waiting years for Neiman to sell it, Mr Kamensky believed he could wring some extra profit from the opportunity he had created. So he offered to buy out other creditors for 20 cents on the dollar.

After discovering that the investment bank Jefferies was also considering a bid — one higher than his — for the MyTheresa shares, Mr Kamensky called the investment bank threatening to stop doing business with Jefferies, where he was a client, if they got in his way. Having spent nearly $4m fighting Neiman Marcus, he explained, that he was determined to enjoy the spoils. In chat messages sent through Bloomberg terminals, Mr Kamensky used intimidating language — “DO NOT SEND IN A BID” read one of them, according to an investigation published by the Department of Justice. Jefferies later reported Mr Kamensky’s actions to other creditors.

“I am sorry to see the ugly turn of events,” says Sara Tirschwell, a longtime distressed debt investor who had once planned to go into business with Mr Kamensky. “But happy that Dan finally exposed the bad faith schemes that private equity sponsors use to keep assets out of reach from creditors”.

Ares insists that the MyTheresa transaction was above board and was designed to maximise value for all stakeholders in Neiman Marcus. The firm has pointed out that it had never taken any fees or dividends out of the retail business or missed a principal or interest payment to creditors. And in the 2019 refinancing transaction, Ares had invested another $100m that now has been mostly lost — further evidence, its supporters argue, that it believed the company was solvent and acted in good faith.

Neiman Marcus exited Chapter 11 in late September at just a $2bn valuation. MyTheresa remains a separate company. Marble Ridge is in the process of dissolving its operations. And while the $172m for unsecured creditors remains in a trust, Mr Kamensky — whose campaign wrung the payment out of Neiman Marcus — is trying to avoid jail.

Source: Financial Times

Can’t stop reading? Read more