Banks Holding Morrison Buyout Debt Consider Sterling Bond Dump

24 Apr 2022, 03:16 PM IST

(Bloomberg) -- The lead banks backing the financing for the buyout of Wm Morrison Supermarkets PLC are considering offloading a chunk of the debt package at a steep discount, reworking the deal to make it more palatable to investors ahead of a much-anticipated wider sell-down.

Lenders including Goldman Sachs Group Inc. and BNP Paribas SA, are in talks with credit funds to pre-place 1.2 billion pounds ($1.5 billion) of senior secured sterling notes, according to people close to the matter who requested anonymity as the discussions are private. Private-equity firm Clayton, Dubilier & Rice’s 6.6 billion pound acquisition of the grocer was the largest leveraged buyout of a British company in more than a decade.

The proposal is the latest twist in the long-running saga surrounding financing for the supermarket. The banks underwrote the debt package in August, when the market was much more favorable to borrowers. Since then, however, conditions have deteriorated significantly. In February, banks managed to place privately the riskiest part of the debt -- 1.2 billion pounds of junior secured notes -- to CCPIB, but only by taking a 20% hit to their fees.

Since then, the situation hasn’t improved, with Europe’s high-yield bond market effectively shut since Feb. 10. Sales of fixed-income assets were already struggling due to the prospect of rising interest rates, and Russia’s invasion of Ukraine has only deepened investor unease. Sterling issuers also have to grapple with lower levels of liquidity in a relatively small market.

The Morrison paper is being shown in the low 90s but some credit funds may need a higher yield than that, the people said. The notes have an interest payment cap of 5.5%.

BNP Paribas declined to comment. CD&R and Goldman Sachs didn’t immediately respond to a request for comment.

Deal Terms
After a sale of the junior notes in early February, 700 million pounds of the 2.4 billion pounds senior secured notes were expected to be denominated in euros, reducing the sterling senior secured notes to 1.7 billion pounds. The banks then sweetened the terms of the deal further at the end of February by reducing the sterling fixed-rate notes again by an additional 500 million pounds to 1.2 billion pounds, and increasing the euro-denominated debt by the same amount. The banks will look to syndicate the rest of the financing in an open process. The rest of the financing is expected to comprise a 1.5 billion pound euro-denominated TLB, a 500 million-pound TLB and 1.2 billion pounds of euro-denominated senior secured notes. Either the euro-denominated term loans or senior secured notes will be increased by up to 500 million pounds-equivalent.

Deal Terms

After a sale of the junior notes in early February, 700 million pounds of the 2.4 billion pounds senior secured notes were expected to be denominated in euros, reducing the sterling senior secured notes to 1.7 billion pounds.

The banks then sweetened the terms of the deal further at the end of February by reducing the sterling fixed-rate notes again by an additional 500 million pounds to 1.2 billion pounds, and increasing the euro-denominated debt by the same amount.

The banks will look to syndicate the rest of the financing in an open process. The rest of the financing is expected to comprise a 1.5 billion pound euro-denominated TLB, a 500 million-pound TLB and 1.2 billion pounds of euro-denominated senior secured notes. Either the euro-denominated term loans or senior secured notes will be increased by up to 500 million pounds-equivalent.

Europe’s leveraged loan market is receiving borrowers positively, with a number of recent deals tightening pricing during syndication on the back of investor demand. Morrison is expected to generate interest given its established market position in the sector and significant property ownership.