After struggling to maintain its market share against discounters during the initial stages, Morrisons’ debt was sold at a steep discount.
Since October 2021, when the company was privatized, banks have sold a tranche of the supermarket’s debt for 85c on the euro to hedge funds.
According to Bloomberg, Apollo Global Management was among a few hedge funds that purchased debt worth EUR500 million.
Moody’s had downgraded the supermarket’s credit rating after it was purchased by Clayton, Dubilier & Rice. The debt pile had reached PS5.9 billion.
Morrisons credit rating has been lowered further to junk territory because of its “operating belowperformance” last year, when it failed to compete with Aldi and Lidl.
Moody’s stated in its rating decision: “[The rating] considers that the company’s relative smaller scale and greater market share loss to discounters during fiscal 2022 than the other ‘Big Four’ UK grocery stores.”
After Aldi, a German discount chain, took over its market share, Morrisons was l in the last year.
Morrisons was slow to adapt and react last year, as consumers tried to save money while eating out. According to Moody’s analysts, it lost more market share last year to discounters than its peers as it began increasing prices at an “rapid rate” starting in June.
To win back families who were struggling to pay rising interest rates and utility bills, the supermarket began increasing its prices from mid-October.
Analysts stated that Morrisons’ biggest problem was its debt accumulation, which may have limited its ability to compete with the smaller margins of competitors.
Shore Capital’s Clive Black stated that a “sharpening” of the pencil’s value would be needed in 2023 because its prices had “become out of control with the pack in 2022, and shoppers noticed”.
Morrisons’ chief executive stated that the company has implemented a program of price reductions and price freezes as well as fuel promotions. This has helped improve its competitiveness. The total number of price reductions was more than 1,000, with 820 additional products being reduced last month.
According to Kantar data, Morrisons’ market share has stabilized and sales have risen in the Christmas period, Moody’s reported.
Moody’s stated that Morrisons’ profit growth would be “hampered” by restructuring and other extraordinary costs as it integrates the 132 McColl’s shops into its wider business. Moody’s also warned Morrisons of high governance risks because of its aggressive financial strategy, high leverage and majority ownership in private equity.
Andrew Ellman, Shore Capital’s fixed income analyst, stated that the moody’s are concerned about the highly leveraged company. The two discounters are also chasing them in terms sales. They will have to work hard in the future.
They still have Morrisons on negative monitor. They’re monitoring events and, if they see an increase in sales, they can remove it from negative watch without any changes to the rating.
“But they are analyzing what’s happening now, and obviously if further negative sales figures are reported by the company then it wouldn’t surprise if they get another downgrade.”
A retail advisor said that the supermarket’s short term trading strategy would not be affected by the downgrading. He questioned, however, whether credit insurers could be “wobbled” by the news.
Over the past six month, credit insurers have decreased coverage for UK food retailers, including Iceland. Coface, a French credit insurance provider decided earlier this month to suspend credit insurance coverage to some Iceland’s suppliers due to concerns over the effect of rising energy prices on the supermarket.
Credit insurance gives suppliers the assurance to trade because it pays out if a customer fails to pay their bill.
Morrisons has tried to hedge against rising interest rates by fixing and hedging 75% of its debt. Moody’s said that the company had sufficient liquidity from its PS287million cash pile and PS470million available for drawdown from its revolving loan facility.
CD&R won an auction in Morrisons 2021.
Morrisons and CD&R declined comment.
The banks had hoped for a smooth ride in signing up to support Clayton Dubilier & Rice’s bid to take Morrisons from the London stock exchange in 2021 (Helen Cahill writes).
After the Issa brothers, TDR Capital and their private equity backers TDR Capital financed an Asda takeover worth PS6.8billion, Goldman Sachs was hired to act as an advisor.
CD&R had promised PS10 billion to Morrisons at the end of the bidding war against Fortress. Banks such as Goldman, BNP paribas, and Bank of America were involved in the purchase package.
However, debt transactions following the takeover were delayed by turmoil in the markets. Banks sought to sell billions of dollars in debt as it became clear that interest rates would need to rise.
Shortly before Russia invaded Ukraine, Goldman could sell PS1.2 billion worth of junior debt to Canada Pension Plan Investment Board for 94% of its face value.
As the debt markets cool, subsequent deals were made at steeper discounts. Morrisons’ debt, which totalled around PS1 Billion, was sold to Hayfin and Ares at 89 percent of its face value in April 2022. A tranche of euro-denominated euro-denominated Debt was sold to Pimco in July at 87.25 Cents on the euro.
The banks have been waiting for better prices, but so far they have not been satisfied. Lenders now have around PS1.3 billion in loans they can continue to market.
If Morrisons cannot revive its sales, it could face further rating downgrades. The banks may also be subject to further discounts if Morrisons, one of the largest take-private deals in recent years, turns sour.