Morrisons under pressure as takeover debt costs rise
Morrisons private equity owners have sought to allay fears that pledges designed to honor the legacy of its founding family are threatened by a mounting interest bill.
Soaring inflation and rising interest rates mean bridge loans that need to be refinanced will cost more than previously thought, adding pressure to the supermarket’s stretched balance sheet.
The specter of a soaring interest bill risks leaving Clayton, Dubilier & Rice (CD&R), which won a £10billion battle for Morrisons in October, with no choice but to cut costs in order to to balance the accounts once its redemption is complete.
But CD&R sought this weekend to allay concerns. A spokesperson for the US-based investment firm said: “CD&R values Morrisons’ distinctive business model and is committed to supporting it.”
The unusual intervention follows fears that were raised when a bidding war broke out for Morrisons last year that the late Sir Ken Morrison’s thrifty approach, debt aversion and commitment to farming British could be threatened.
Morrisons is the UK agriculture’s biggest customer and works directly with over 3,000 farmers and 200 producers. Last month rival Asda dropped its promise to sell 100pc of British beef due to rising prices.
Before agreeing to the deal, CD&R said it “recognizes the importance of the integrated model and will help Morrisons invest in its supply chain and nurture relationships with its supplier network.” Sir Ken, son of William Morrison, the supermarket’s founder, prided himself on financing the roll-out of new stores from profits rather than debt.
Private equity would typically seek to sell freehold properties to boost returns, but CD&R has previously said it has no plans to offload a ‘material’ number of freehold properties from Morrisons as part of a series of non-binding promises made as part of the takeover deal. He also said he would review the chain’s nearly 500 stores, as well as its manufacturing and packaging sites.
Meanwhile CD&R, whose bid was led by Sir Terry Leahy and made alongside a group of US hedge funds, said it would review Morrisons’ estate of 339 petrol stations. They could be combined with MFG, with another business owned by CD&R, although this would likely raise competition concerns.
Lenders who have made senior loans are increasingly worried about having to offload their debts at a discount. CD&R delayed plans to raise £6.6bn of debt in December to repay banks that funded its takeover bid, amid fears over uncertainty surrounding the omicron variant implicated at the time .
One lender said it would “stay on its exposure” for now in hopes that market conditions would improve. However, banks holding some of Morrison’s higher-quality loans are now preparing to sell their debt at a small discount that could eliminate fees and interest, the person added.
Last week, lenders holding £1.2billion of Morrison’s riskiest debt were forced to sell them at a 20% discount to the Canada Pension Plan Investment Board, which a main lender sent “shivers down some people’s spines”. Morrisons will pay interest at a rate of 6.5pc.
In total, the lenders received £249 million in interest and fees for financing the CD&R takeover.
Althea Spinozzi, senior fixed income strategist at Saxo Bank, said corporate bond interest rates for higher quality debt had risen since the start of the year.
She said: “It’s no surprise that investors are more selective in choosing debt in an environment of high inflation and rising interest rates.”
City sources said debt markets had also been spooked by reports that Morrisons chief executive David Potts was considering quitting in around two years and that the supermarket had hired Skill headhunters Capital. Sources close to Morrisons and CD&R insist Mr Potts will not step down in the next two years.