Buyers of Walmart’s U.K. Brand Weigh Tying Funding to ESG Goals

(Bloomberg) -- The buyers of Walmart Inc.’s U.K. arm are considering linking the interest rate on loans funding the acquisition to environmental, social and governance targets, according to people familiar with the matter.

Private equity firm TDR Capital and billionaire brothers Mohsin and Zuber Issa plan to raise debt worth 3.65 billion pounds ($4.9 billion) to buy grocery chain Asda Group Ltd. A Barclays Plc-led bank group has started to sell some of the loans to bank lenders, and the rest -- comprising bonds and loans -- may be sold to investors early next year.

Asda would add a high-profile name to the handful of sub-investment grade firms that have raised loans to date in Europe where the interest margin changes based on performance against ESG goals.

Discussions around the use of an ESG pricing ratchet on Asda’s buyout loans are at an early stage and it’s not certain whether it will ultimately be used, the people said, asking not to be identified discussing private information.

Representatives for Asda, the Issa brothers, TDR and Barclays declined to comment.

Rapid Growth

This form of lending has grown rapidly among investment-grade borrowers, but remains rare for companies that are bought by private equity sponsors and rated lower. Out of the $86 billion loans raised globally this year with ESG pricing ratchets, only $3.2 billion has come from junk-rated companies, data compiled by Bloomberg show.

Other companies setting ESG targets on loans have based them on objectives such as emissions, recycling and water usage. Asda’s existing plans include cutting carbon emissions to zero by 2040 and halving waste production, according to a statement on its website.

Last month the retailer opened its first sustainability store in the north of England with refill stations for cereal, coffee beans, pasta, shampoo and other goods, the company said. It also made a national promise to customers that loose and unwrapped products won’t be more expensive than wrapped.

ESG Forerunners

Fund managers are currently reviewing a leveraged loan deal for French food safety firm Kersia where pricing is tied to three ESG goals.

Read more: French Borrower Offers Rare ESG Targets on Buyout Loan Payment

Kersia’s interest payments stand to rise or fall by up to 7.5 basis points depending on whether it meets targets on packaging recycling, green products, and the number of employees owning shares.

Borrowers can choose to apply an ESG ratchet to all or part of their loan facilities, as shown by Spanish telecommunications group Masmovil Ibercom SA, the first European company to sell ESG-linked leveraged loans.

The company initially tied pricing on capital expenditure and revolving credit facilities raised in May 2019 to an ESG rating, Bloomberg previously reported. When it returned for fresh financing this year it applied a ratchet across all the loan facilities, including a 2.2 billion-euro term loan. That’s currently the largest junk-rated deal of its kind in Europe.

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