Clayton, Dubilier & Rice has delayed plans to raise £6.6bn in debt to finance its buyout of supermarket chain Wm Morrison, the UK’s biggest take-private deal in more than a decade.
The US private equity group had planned to tap markets late last month for a financing package that would include one of the largest sterling bond sales on record, after agreeing the £10bn deal to take control of Britain’s fourth-largest supermarket chain in October.
The refinancing plan has now been put back to 2022, people familiar with the matter said, as bond market investors grow increasingly nervous about the potential impact of the Omicron variant of coronavirus.
Some would-be investors had expressed concerns about Morrisons’ debt before the delay, which was first reported by Bloomberg.
CD&R declined to comment on the report.
CD&R intends to put in place debt financing of up to £6.6bn, comprising £2bn of term loans from banks, a £1bn revolving credit facility and £3.6bn of bonds, documents show. That would be more than twice the level of debt that the group has carried in recent years, even before lease and pension obligations are included, and is more than six times its reported earnings before interest, tax, depreciation and amortisation.
Relative to profits, it is also higher than the debt taken on by the billionaire Issa brothers and private equity firm TDR when they acquired Asda, the UK’s third-largest supermarket, in a £6.8bn deal completed earlier this year.
One junk bond investor said last month that the Morrisons financing was “one step too far”, noting that the £6.6bn debt was not far off the company’s entire £7.6bn enterprise value in June, before a bidding war pushed up its share price this summer. The extra borrowing would leave the supermarket with little room for manoeuvre if performance declines, he added.
“Morrisons would have to offer a higher yield because it’s more highly levered than Asda . . . they would not be leaving themselves much wiggle room,” he said. “They may well prefer to wait until the market calms down.”
CD&R said in September that it would put up £3.4bn of equity towards the £10bn cost of buying the grocer. That is a proportionately larger slice than the £780m of equity contributed by TDR and the Issas to the Asda deal.
However, £1.3bn of that figure will be provided by credit funds run by Goldman Sachs and Ares Management in the form of “preference shares”, an instrument considered halfway between debt and equity, documents published by the supermarket group show.
These will pay the equivalent of an 11.5 per cent annual dividend, which can be rolled up rather than paid every year.
The Morrisons fundraising is the latest in a series of high-yield bond issuances to be delayed after the emergence of the new variant of coronavirus, which has raised fears of an economic slowdown that might leave lower-rated companies struggling to service their debts.
That followed a broader junk bond sell-off, with US high-yield bonds falling last month by the most since September 2020.
Credit market observers expected that the Morrisons package would overtake Asda’s £2.75bn fundraising in February as the UK’s largest-ever high-yield debt issue.
Many analysts expect that, like Asda, Morrisons will sell assets in order to reduce its leverage. During the bidding battle for Morrisons, CD&R said it “does not intend to engage in any material store sale and leaseback transactions”, but it was careful not to rule out store disposals altogether, nor sales and leasebacks of property elsewhere in its estate including distribution and food production assets.
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