Banks Face Losses as They Finalize Latest Sale of Morrison Debt

(Bloomberg) -- Banks are finalizing a private sale of another part of the 6.6 billion pound ($8.3 billion) debt backing the buyout of Wm Morrison Supermarkets PLC. If it goes through, they’ll lose their fees for the deal and then some.

Goldman Sachs, BNP Paribas and others are selling a 1.2 billion pound tranche of top-ranked bonds to direct lenders and credit funds, according to people familiar with the matter who asked to remain anonymous because the discussions are private. The notes, which pay interest of 5.5%, are being offered at a discount of around 89% of face value, they added.

It’s the latest twist in the saga surrounding the financing for the supermarket. The banks originally underwrote the debt package for the Clayton, Dubilier & Rice acquisition in August, when the market was much more favorable to borrowers. Since then, however, conditions have deteriorated.

Russia’s war in Ukraine, soaring inflation and higher interest rates fueled a rise in borrowing costs across markets. Together, they drove up the average yield on junk corporate debt in the U.K. by more than 230 basis points since the start of August, and also led to Europe’s longest drought in high-yield bond sales in over a decade.

In February, banks managed to place privately the riskiest part of the debt -- 1.2 billion pounds of junior secured notes -- to the Canada Pension Plan Investment Board, at 93.8 percent of face value at the beginning of February. The banks took a 20% hit to their underwriting fees, but still, it looks like a good deal in comparison to the current discount. Spokespeople for Goldman Sachs and BNP Paribas didn’t immediately respond to a request for comment. CD&R declined to comment.

After the CPPIB deal, the banks sweetened the terms of the overall financing further, adjusting currencies and moving as much as possible into euros, a more liquid currency. They are also expected to have shifted around 500 million pounds of the debt package into a term loan A, which will be held by banks, the people added.

The latest developments aim to make the rest of the financing more palatable to investors and easier to sell down the remainder. The rest of the financing will be sold in a public syndication process shortly. Banks still need to offload 2.7 billion pounds of the 6.6 billion pound financing. 

Goldman Sachs, BNP Paribas, Bank of America and Mizuho provided initial underwriting and were joined by a further eight banks in September including Santander, Rabobank, Deutsche Bank, Intesa Sanpaolo, MUFG, NatWest, Societe Generale and SMBC. HSBC, ING, Lloyds and RBC joined the line up in December.

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