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Recommended £2.57bn cash offer by Cobham Group Limited
August 2021
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c.£300m acquisition of Dennis
August 2021

Debt Advisory Update

Plenty going on this week and, between the expected snow and 66 hours of non-stop TV sport (cricket / rugby / tennis / football / American football / golf / snooker), it’s lining up to be a refreshingly different weekend.
In other news today, coming soon to a clinic near you - Russia’s Sputnik V jab …

 

Debt weekly image - 5 February
TL / DR:  Asda’s delivery; lawyers’ lapses; BoE’s double negatives

1.   Asda’s supermarket sweep

  • Deal of the week is the acquisition financing for Asda.  Hats off to the TDR and Issa team: they are taking control of a business worth £8.5bn (inc capitalised leases) without using any of their own money.
  • They are tapping all available forms of “other people’s money”: Walmart is chipping in a £0.5bn PIK; the leveraged loan / bond markets will provide £3.7bn; landlords are funding £2.75bn of property including a new sale & leaseback; their sister company EG Group is providing £0.75bn through the acquisition of Asda’s forecourts and a holdco preference share which should cover the £780m of actual new equity.
  • Asda will end up with c. £7bn of debt including leases and Walmart’s PIK and just over 5x adj EBITDA ( vs Morrisons at well under 4x).
  • Ahead of the largest ever sterling high yield bond, Asda’s banks are throwing everything at the deal: Green wrapper (5bp potential step-down in margins), attacking four different markets (EUR and GBP, loans and bonds), good credit ratings (Ba2 / BB- ratings), tapping other credit pools like EG, making use of a hot property market for distribution centres.
  • Pricing for the loan has already tightened by 0.25% to E+3% and I think the bonds will also fly. Despite the leverage, financing costs /rents should be manageable and even leave some cash for reinvestment.
  • In the course of checking the background for this, I discovered the origin of both Asda (Associated Dairies) and MFI (Mullard Furniture Industries, after a spouse’s maiden name), which I had forgotten Asda had acquired in the mid-1980s.  Let’s hope the Issa’s have more success.  We should also celebrate Asda as the training ground for Archie Norman and Allan Leighton

2.   An honest mistake m’lud

  • Much like with Citi’s “fat finger” mistake, when Vinny Fratta accidentally wired $900m to litigating hedge funds, it’s easy to feel schadenfreude when hearing how Kirkland & Ellis got Cineworld’s drafting wrong at a cost of c. $30m p.a.
  • After renegotiating some of its loans last summer, Cineworld’s lawyers K&E added a “Libor floor” of 1% in its existing $3bn loans, which maybe should have remained 0%.K&E and Cineworld claimed this was a drafting mistake but the lenders believed it was all part of the negotiations – and Cineworld is paying up (or maybe K&E is?).
  • It’s pretty difficult to claim “mistake” in a legal document where both sides were well-advised. Terra Firma in 2019 redefined English law by successfully winning rectification of a drafting mistake by A&O which accidentally pledged assets worth £200m+ to a distressed debt fund.A&O was presumably relieved though probably didn’t enjoy two of its partners pointing at each other like that Spiderman meme, saying “I thought you read it” (point 110 here).
  • The obvious lesson: even though loan documents have doubled in size over the last 10 years, especially if under NY law, everyone needs to go through them. Fortunately, we happen to enjoy it!

3.   Negative rates, or maybe not

  • This week, the Bank of England stepped up its requirements for banks to prepare for negative rates within 6 months, whilst at the same time maintaining that these formed any part of its plans.
  • Money markets have bought it, with rates and sterling rising, and it’s not hard to believe that the Bank of England just wants to avoid the typical UK government SNAFU.
  • But it does feel a bit like buying all the ingredients for a birthday cake while denying that you’re getting any older.
  • Negative rates would widen the gap between borrowers which have access to debt capital markets and those which don’t: negative rates hit bank profitability leading to higher loan rates; but debt capital markets will be boosted further as investors take on more risk in search of yield.

UK debt financings this week:

  • Whitbread has raised a £550m green bond to repay existing private placement debt worth £284m.The green wrapping enabled the deal to be upsized by £50m and price 0.5% tighter than initially indicated. Whitbread also added a year to its RCF by 1 year to Sept-23 along with covenant waivers in exchange for stepping the facility down by £100m+ p.a. from 2021.
  • Dr Martens has agreed a £500m equivalent loan (€337.5m TL and £200m RCF) as post-IPO financing to refinance existing debt.
  • Asda to follow next week after it’s priced all the debt. The bonds are expected to be launched around 3.5% senior, 5% subordinated – my bet is they come tighter.

Mike Beadle

Managing Director, Debt Advisory

Email Mike

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