Neiman Marcus 2010 Annual Report Download - page 14

Table of Contents
• limiting NMG's ability to obtain credit from our vendors and other financing sources on acceptable terms or at all.
NMG's interest expense could increase if interest rates increase because the entire amount of the indebtedness under the
Senior Secured Credit Facilities bears interest at floating rates, primarily based on LIBOR. As of July 30, 2011, NMG had
approximately $2,060.0 million principal amount of floating rate debt, consisting of outstanding borrowings under the Senior Secured
Term Loan Facility. However, pursuant to the interest rate cap agreements, NMG has capped LIBOR at 2.50% through
December 2012 with respect to $500.0 million notional amount of such agreements in order to hedge the variability of our cash flows
related to a portion of our floating rate indebtedness. In August 2011, NMG entered into additional interest rate cap agreements for an
aggregate notional amount of $1,000.0 million. These agreements cap LIBOR at 2.50% from December 2012 through
December 2014.
Significant amounts of cash are required to service NMG's indebtedness, and any failure to meet its debt service obligations
could harm its business, financial condition and results of operations.
NMG's ability to pay interest on and principal of the debt obligations will primarily depend upon NMG's future operating
performance. As a result, prevailing economic conditions and financial, business and other factors, many of which are beyond its
control, will affect its ability to make these payments.
If NMG does not generate sufficient cash flow from operations to satisfy the debt service obligations, NMG may have to
undertake alternative financing plans, such as refinancing or restructuring its indebtedness, selling of assets, reducing or delaying
capital investments or seeking to raise additional capital. Our ability to restructure or refinance NMG's debt will depend on the
condition of the capital markets and our financial condition at such time. Any refinancing of NMG's debt could be at higher interest
rates and may require it to comply with more onerous covenants, which could further restrict its business operations. The terms of
existing or future debt instruments may restrict NMG from adopting some of these alternatives. In addition, our borrowing costs and
ability to refinance may be affected by short-term and long-term debt ratings assigned by independent rating agencies, which are
based, in significant part, on NMG's performance as measured by indicators such as interest coverage and leverage ratios.
Furthermore, any failure to make payments of interest and principal on NMG's outstanding indebtedness on a timely basis would
likely result in a reduction of NMG's credit rating, which could harm its ability to incur additional indebtedness on acceptable terms.
Contractual limitations on NMG's ability to execute any necessary alternative financing plans could exacerbate the effects of
any failure to generate sufficient cash flow to satisfy its debt service obligations. The Asset-Based Revolving Credit Facility permits
NMG to borrow up to $700.0 million; however, NMG's ability to borrow and obtain letters of credit (including amendments, renewals
and extensions of letters of credit) thereunder is limited by a borrowing base, which at any time will equal the sum of (a) 90% of the
net orderly liquidation value of eligible inventory plus (b) 85% of the amounts owed by credit card processors in respect of eligible
credit card accounts constituting proceeds arising from the sale or disposition of inventory, less certain reserves. In addition, at any
time when incremental term loans are outstanding, if the aggregate amount outstanding under the Asset-Based Revolving Credit
Facility exceeds the reported value of inventory as calculated under that facility, NMG will be required to eliminate such excess
within a limited period of time. If the amount available under the Asset-Based Revolving Credit Facility is less than the greater of
(a) 12.5% of the lesser of (i) the aggregate revolving commitments and (ii) the borrowing base and (b) $60.0 million, NMG will be
required to repay outstanding loans and, if an event of default has occurred, cash collateralize letters of credit. In addition, NMG is
required to maintain excess availability of at least the greater of (a) 10% of the lesser of (i) the aggregate revolving commitments and
(ii) the borrowing base and (b) $50.0 million. Our ability to meet the conditions described in this paragraph may be affected by events
beyond our control.
NMG's inability to generate sufficient cash flow to satisfy its debt service obligations, or to refinance its obligations at all or
on commercially reasonable terms, could have a material adverse effect on its future business, financial condition and results of
operations.
Agreements governing NMG's indebtedness restrict NMG's current and future operations and restrict its ability to take
certain actions.
The credit agreements governing NMG's Asset-Based Revolving Credit Facility and Senior Secured Term Loan Facility and
the indentures governing the Senior Subordinated Notes and the 2028 Debentures contain, and any future indebtedness of NMG would
likely contain, a number of restrictive covenants that impose significant operating and financial restrictions, including restrictions on
NMG's ability to engage in acts that may be in its best long-term interests. The
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