Retailer EG Group had to significantly change the structure of a US$2bn-plus refinancing as it sought to close a transaction on Friday to clean up its hefty capital stack. Pricing on the bond portion, which accounted for the majority of the financing, was also at the high end of the company's targets, reflecting its uncertain outlook.
EG Group, which is owned by the Issa brothers and private equity group TDR Capital, dropped a planned add-on loan, introduced a privately placed floating-rate note that is 50% payment-in-kind, and refocused a US$1.6bn-equivavent high-yield bond sale towards the US dollar market at the expense of its euro counterpart. The call structure on the notes was also changed.
The trade, which was due to price officially as IFR was going to press, is the follow-up to the completion of UK supermarket operator Asda's purchase of a majority of EG’s UK and Ireland business for an enterprise value of £2.07bn in a deal engineered to help the group to tackle its maturity wall and cut debt. The Issa brothers and TDR also own Asda.
Debt-ridden EG Group (B3/B–/B) was always going to face a difficult path due to concerns about its credit outlook. S&P, for example, estimates that adjusted leverage will remain close to eight times in 2024, despite asset disposals.
“It’s not that people don’t like the end business with EG," said a leveraged finance banker away from the deal. "It’s more about leverage and how the financial policy is being run.”
He contrasted EG Group with chemicals firm Ineos Quattro (Ba3/BB/BB), which was also in the market last week with a €900m-equivalent dual-tranche bond and US$1.1bn and €875m term facilities. He said that with Ineos, "people love how they run the business; it’s not overlevered", and that there are instead question marks around the sector in which it operates. In contrast, he said EG is "overlevered", with concerns around how the company plans to address that.
Tackling debt
Those concerns were central to last week's offering from EG that was directed at tackling nearly US$2.5bn of debt due in 2025 and 2026. With a US$500m-equivalent add-on to EG’s February 2028 term loan B already in the market, the banks, with Barclays as lead-left, announced the bond portion on Monday for a US$1.6bn-equivalent transaction of five-year non-call two senior secured notes.
The original terms suggested the bonds could be equally weighted to US dollars and euros, with minimum tranche sizes set at €500m/US$500m. Initial price thoughts were mid-to-high 10s for the euro note and high 11%–12% for the US dollar bond.
However, despite a one-notch upgrade by Fitch to B on Monday, by Friday the deal structure had been radically altered.
The loans were dropped. A US$500m five-year FRN, with 50% PIK, was announced as sold to "two high-quality investors" at SOFR plus 750bp, with a 97 OID, implying a yield in the low teens. A US$200m asset disposal bridge facility maturing in February 2028 was put in place at 550bp over SOFR/Euribor. And the bonds, in which the call option was extended by six months to 2.5 years, were skewed much more to the US dollar market.
While the overall size of the bond portion was roughly the same, the US dollar tranche was increased to US$1.1bn–$1.2bn, while the euro note was in a €400m–€500m range. Pricing terms were changed to 11.75%–12% for the US dollar note and 11% area for the euro bond. In the end, the company raised US$1.1bn at 12% and €468m at 11%, reflecting the US dollar market's greater liquidity.
Tough sell
Investors said the revamp highlighted that while borrowers such as EG can tap various types of lenders, some are tougher to convince than others. “It is clear that the euro loan market is not the place for them. That’s obvious and they have had all the signals from investors in pre-marketing," said a European CLO investor who noted that the FRN appears to be "pretty expensive".
For some, the problem with the company isn't just its financials but also the business. "The house is still in fine shape, but EG Group, especially with the amount of assets they have in Europe, is just going to be a secularly challenged business," said a US high-yield investor.
A European leveraged finance investor was more blunt. “It’s partly the sector and retail, but also I’ve never liked how much of the underlying credit story is driven by how much money they make or don’t make from petrol prices going up or down. I’ve never been able to get much transparency around that."
Barclays and EG Group did not respond to requests for comment.
Additional reporting by Candy Chan, Robert Hogg, Timothy Sifert