The sale of the long-awaited £6.6bn leveraged financing backing the buyout of Morrisons has been shelved until 2022, forcing the lead banks to sit tight on the underwriting risk as management at Britain's fourth-biggest supermarket group focuses on Christmas trading.
The financing backing the buyout by Clayton Dubilier & Rice had been pre-marketed to investors towards the end of November, but the decision has now been taken to hold off launching a general syndication until the new year, banking sources said.
Lenders had wanted to pull the trigger on the deal this year ahead of the prospect of further market uncertainty in 2022 as global central banks start changing tack in their monetary policy. Plan A for the financing was to get it out in November – or failing that, before mid-December – but bankers said they would only do so if the pricing made sense.
That timing became impossible as a combination of rising rates, supply chain snarl-ups and inflationary risks meant that secured bonds sold by the UK supermarket's closest comparable, Asda, started to trade well under par, meaning that leads were facing a tight squeeze to get the transaction across the line under the level at which yields are capped.
Bankers are now hoping that January 2022 will not come with further surprises. The expectation is, with investors recharged and ready to put fresh allocations to work, the deal will be an easier sell. Lenders will also be hoping that the supermarket will enjoy bumper Christmas sales to show to investors in January.
"I think the fact that they've decided to [delay] it says they feel okay about it. I'm not overly concerned about it," said a loan syndicate head. "Obviously people are mindful about what their balance sheets look like at year-end, but to put it another way, if you're looking at another six weeks of exposure on something you've already carried for a few months it's not that significant."
The offering memorandum on the Morrisons financing was not ready to launch a formal process, while at the same time it was preferable for Morrisons' management to focus their energies on Christmas trading rather than attending roadshows and speaking with institutional investors during what is historically the busiest period for the food and retail sector, the sources said.
The decision to delay the process also comes against a softening market dealing with a new Covid-19 "variant of concern" and a fifth wave across Europe. Europe’s top 40 leveraged loans dropped 26bp in the secondary market to 98.8% of face value on November 26 from 99.06 on November 25 following British Prime Minister Boris Johnson unveiling a number of new measures to try to stop the spread of the Omicron variant.
Investors are also winding down for the holiday period, fatigued after an extremely busy year filled with a massive amount of deal flow. Appetite for a new jumbo deal at this point in the year was waning.
“Given the size of the deal, it is not one to bring out with this amount of volatility in the market,” a second syndicate head said.
Year-to-date European leveraged loan volume stood at US$231.97bn on December 2, compared with full-year volume of US$179.5bn in 2020. So far it is the highest volume since US$258.77bn was raised in 2017, according to Refinitiv LPC data.
“It has been a strong but long year and most accounts are tired. They have cash but no one needs to be a hero and they’d much rather see how the new strain plays out and begin investing again next year. Investors are not panic-selling but there is also no need to buy new risk either after such a good year. They’d much rather go out for lunch,” a third syndicate head said.
Bankers insist that the decision to delay is not a reflection on the credit itself, which has met a positive response from investors keen on the asset and happy with the sector after Asda announced positive results on November 29.
Because of its size, the financing does need to command the full attention of investors across loans and bonds – in euros and sterling.
“Morrisons requires a market that is open and enthusiastic. Asda has good results and no one is worried about it as a credit,” the third syndicate head said.
The financing is set to comprise a £1.5bn euro-denominated TLB; a £500m TLB; £2.4bn of senior secured notes; £700m of senior unsecured notes; £500m of euro-denominated senior unsecured notes; and a £1bn RCF.
“We can't have people doing 50% of what they would do normally; there needs to be a full participation,” the second syndicate head said.
While underwriters don’t like holding risk over a holiday period, a lot of banks have been brought into the deal and that will lighten the burden.
Goldman Sachs, BNP Paribas, Bank of America and Mizuho provided the underwritten financing and reduced their position to 50% after being joined in September by a further eight banks – Santander, Rabobank, Deutsche Bank, Intesa Sanpaolo, MUFG, NatWest, Societe Generale and SMBC – as lead arrangers and underwriters.
Rabobank committed 9.6%, NatWest 8% and the rest took 5.4% each. A third wave of banks followed, including Lloyds and RBC, which is expected to have reduced the four leads position from 12.5% to below 10% each.
“Holding exposure over Christmas is not ideal and it is not an insignificant amount, but given the amount of selldown to a load of banks no one has that much exposure,” the second syndicate head said.