(Bloomberg)—The prospect of unifying Saks Fifth Avenue and Neiman Marcus—two of the retail industry’s swankiest brands—has brought both hope and fear to the department-store chains’ weary investors.

Speculation that Saks owner Hudson’s Bay Co., No. 75 in the Internet Retailer 2016 Top 500 Guide, will buy Neiman Marcus Group Ltd. (No. 36) sent bonds of the latter company surging on Tuesday—a sign that a deal may bring some payoff for owners of the junk-rated debt. But equity investors in Hudson’s Bay had a more muted reaction, sending shares of the Canadian company down as much as 2.4%.

If a deal does happen, the central question is what happens to Neiman Marcus’s almost $5 billion in debt. Hudson’s Bay is looking to acquire the company without taking on that burden, the Wall Street Journal reported on Tuesday. The idea is to use a structure that doesn’t trigger a change in control, so Neiman’s debt isn’t transferred to Hudson’s Bay, according to the newspaper.

It’s not clear what form a deal might take, but a buyer would have to navigate the covenants—the agreements that protect lenders from getting stiffed by borrowers. Even if Neiman Marcus sells only a portion of its assets, “the bonds and credit agreements have asset-sale covenants that you’d have to meet and comply with,” said Anthony Canale, an analyst at Covenant Review.

Strategic review

Neiman Marcus announced earlier Tuesday that it had embarked on a strategic review of its options. The company said it’s working with financial advisers on the process, which may include selling part or all of its business. The retailer’s sales fell 6.1% during the fiscal second quarter ended Jan. 28, its online sales fell 0.4%. In its 10-Q filing with the U.S. Securities and Exchange Commission, Neiman Marcus reported that e-commerce accounted for 31.4% of its total sales during the second quarter, or $438.2 million, down from $440.1 million during the same period last year, when online sales accounted for 29.6% of total revenue.

The nearly 110-year-old retailer, based in Dallas, had scrapped plans in January for an initial public offering. The company also wrote down its brand and other assets by $153.8 million last quarter and rejiggered its corporate structure to give it more financial flexibility.

Hudson’s Bay has previously held talks about acquiring Macy’s Inc. (No. 6), the largest-department store chain, people familiar with the matter said earlier this year. With Neiman Marcus now available, the suitor has redirected its attention, according to the Journal.

An acquisition of Neiman Marcus would fulfill a long-held dream by Hudson’s Bay chairman Richard Baker, according to Steven Salz, an analyst at M Capital Partners Inc. Baker, who was CEO until early 2015, has signaled his interest in the upscale retailer numerous times, Salz said.

“He’s talked about buying Neiman on and off,” Salz said. So investors may not have confidence that it’s actually going to happen this time, he said.

Evaluating opportunities

Hudson’s Bay, based in Toronto, declined to comment on possible talks with Neiman Marcus.

“Generally speaking,” spokeswoman Jen Vargas said in an email, “we selectively evaluate opportunities to accelerate the company’s strategic growth while maintaining or enhancing its credit profile.”

Neiman Marcus is reeling from slower mall traffic and a broader consumer shift away from department stores. Sales at stores open for at least a year fell 6.8% in the second fiscal quarter, which ended Jan. 28. The company posted a net loss of $117.1 million in the period, dragged lower the writedown of its brand. It had reported a profit of $7.9 million in the year-earlier quarter.

Hudson’s Bay, meanwhile, acquired Saks in 2013 in a $2.9 billion deal. That transaction gave the Canadian company a bigger foothold with luxury shoppers in the U.S., where it also operates Lord & Taylor stores and web-only Gilt Groupe. Hudson’s Bay, which touts itself as North America’s longest continually operated business, was begun in the 1600s as a fur-trading enterprise.

The overall industry is coming off a difficult holiday season. Gordmans Stores Inc., a century-old department-store chain in the Midwest, filed for bankruptcy on Monday. It plans to liquidate its inventory and assets.

Neiman Marcus also owns the Bergdorf Goodman luxury stores and the off-price Last Call clearance centers.

Buying Neiman Marcus instead of Macy’s wouldn’t bring Hudson’s Bay as much real estate—an asset it typically craves when pursuing past deals. But Neiman Marcus’s high-end reputation could fit well with Saks.

“Neiman is a different brand from Macy’s,” Salz says. “It’s luxury versus kind of midmarket. It would have different strategic reasons. There’s less real estate at Neiman, but it’s more for the actual retail portfolio—the actual brand.”

Bond reaction

Tuesday’s developments whipsawed Neiman Marcus’s debt, with its $960 million of 8% bonds due 2021 initially dropping to a record low and then rising more than 6 cents to trade above 62 cents on the dollar on Tuesday morning, according to Trace, the bond price reporting system of the Financial Industry Regulatory Authority. The notes were quoted at 58 cents at 4:35 p.m. in New York.

Neiman Marcus’s credit rating was cut deeper into junk territory last month by S&P Global Ratings, which said the retailer’s debt was unsustainable. The company said in a regulatory filing on Tuesday that it has enough cash and credit to fund its operations until the end of this fiscal year. But that timeline only lasts through July, not even the critical holiday season.

The company has about $4.9 billion of debt outstanding, some of it tied to its $6 billion acquisition in 2013 led by Ares Management LLC and the Canada Pension Plan Investment Board. They bought the chain from TPG Capital and Warburg Pincus LLC, which acquired Neiman Marcus for about $5 billion in a 2005 leveraged buyout.

“Under the credit agreements, it seems any sale resulting in permitted holders owning less than a majority would trip the change-of-control provision,’’ said Charles Tricomi, a leveraged loan analyst with Xtract Research.

There is one potential way a buyer could work around the provision, though, Tricomi said. The definition of “permitted holders’’ in Neiman’s documents includes funds and partnerships managed or advised by an equity sponsor. It could be possible for the buyer to set up a fund to acquire the assets that’s advised by Ares or the Canada Pension Plan, constituting permitted holder acquisition, he said.