A $3.75 Billion Asda Junk Bond Sale Will Break Records
(Bloomberg Opinion) -- The biggest sterling corporate bond deal ever is being launched this week to refinance the purchase of Asda, a British supermarket owned previously by Walmart Inc.
It will be a real test of investor appetite amid the mad market rush for seemingly any kind of asset. In normal times, it would be a brave move funding a leveraged buyout by new entrants to the grocery industry with junk-rated debt. But these aren’t normal times, with the world awash in central bank money. We may see more private equity deals for British supermarkets funded this way, as my colleague Andreas Felsted has written.
In this environment, Asda’s bumper sale should be a success. Even though it will be sub investment grade, yield-starved investors will be lured by juicy coupons for a well-known brand in a stable, pandemic-proof industry. The company is Britain’s third-largest grocer with a 15% market share, and it owns more than 70% of its 630 or so stores. While this is a highly leveraged and complicated deal, at least there are some solid assets underpinning it.
Billionaire entrepreneurs Mohsin and Zuber Issa and private equity firm TDR Capital won the bidding race for Walmart’s majority Asda stake in 2020. Their Bellis Acquisition Company Plc vehicle is coming to the high-yield market with a dual-tranche 2.75 billion-pound ($3.75 billion) offering.
Indicated coupons of 3.5% for the senior secured BB-rated five-year tranche, and 4.5% for the 500 million-pound senior unsecured B+ six-year segment, should be more than enough to lure institutions and pension funds from their usual investment-grade comfort zone. Although both coupons will probably be reduced if demand’s strong, there’s plenty of room for Asda's credit spreads to tighten in the secondary market and establish a receptive market for future debt sales of this type.
The logical comparison is with Tesco Plc, the U.K’s largest supermarket chain, whose four-year debt rated BBB- (the lowest rung of investment grade) yields about 0.8%. So the new five-year secured Asda debt, which at 2.25 billion pounds will become the largest single-tranche sterling corporate bond, would offer about 250 basis points more than a comparable Tesco bond. That’s ample reward for the two-notch lower credit rating.
The overall deal at 2.75 billion pounds is bigger than the three-part 2.25 billion-pound deal for Anheuser-Busch InBev in 2017, or Verizon’s dual-tranche 1.2 billion pound sale in 2020, both of which were comfortably investment grade. But that shouldn’t be a problem with so much money around.
One disappointment is that during the Asda takeover battle it was suggested that some of the bonds would be ESG-compliant as part of the new owner’s “significant commitment” to managing the company’s community impact. However, it wasn’t possible to establish ESG credentials for a deal of this size as it was secured on existing supermarket sites.
Nonetheless, this sale will be a serious test of the depth of the sterling high-yield market for large-scale private equity-linked debt and whether big fund managers are happy to take on more credit risk if the rewards are sufficient. If successful, it will be a green light for more M&A activity in post-Brexit Britain.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.
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