City traders are betting on a squeeze at supermarket giant Asda as it grapples with a huge debt pile and a consumer slump.
The food retailer was snapped up less than two years ago by Blackburn brothers Mohsin and Zuber Issa, along with private equity firm TDR Capital.
The deal, fuelled by borrowing money from corporate lenders, has left the company with about £4billion of debt.
Struggle: Asda was snapped up less than two years ago by Blackburn brothers Mohsin and Zuber Issa, along with private equity firm TDR Capital
But City traders are selling off parcels of the company’s corporate loans – known as bonds – at a discount of almost a fifth. The trading suggests investors are increasingly nervous that the chain may struggle to pay the money back in full.
Supermarkets are facing pressure as costs escalate and food inflation bites. A report from the supermarket trade body, the Institute of Grocery Distribution, last week warned that food price inflation could hit 15 per cent this summer – further denting shopper confidence and squeezing profit margins as shops try to absorb costs.
A separate report by credit rating agency Fitch, released last week, warned that further rises in costs could result in desperate customers being offered products in reduced package sizes.
Lidl and Aldi – hellbent on undercutting their mainstream rivals – have grown rapidly in recent years and are seen as potential winners as the downturn worsens.
Corporate bonds are used by Asda’s owners and many private equity firms to raise money to buy businesses, but their value is slipping across the City.
Roberto Pozzi, senior vice president at credit rating agency Moody’s, told The Mail on Sunday that a ‘weak’ performance in the first three months of the year had weighed on Asda in particular.
Sales fell 9.2 per cent to £4.6billion, excluding fuel, while profits dropped 32 per cent.
Asda’s performance was described as ‘credit negative’, which means the agency is cautiously monitoring the situation, although it does not believe that a forecast downgrade is warranted at this stage. Traders at large investment funds buy and sell bonds. These investments are normally more stable than buying shares in companies.
Two of Asda’s bonds – issued in 2020 and 2021 with a value of £2.75billion – are trading at a discount of 17 per cent. Separate bonds, with a total value of around £725million when they were first issued, are trading at a discount of about 10 per cent. The biggest slide was in the past three months.
The figures suggest the total discount of those three tranches of debt, if sold at that price, would be in excess of £500million. Asda still has between three and four years to repay the debt.
The Leeds-based chain was sold by former owner Walmart to the Issa brothers and TDR in October 2020. The debt financing was completed last year.
At the time, the brothers promised to invest £1billion in the chain. Chancellor Rishi Sunak welcomed the deal, posting on Twitter: ‘Great to see Asda returning to majority UK ownership for the first time in two decades today.’
Last month, the supermarket reported ‘severe cost pressures facing consumers’. It said a survey of customers revealed weekly household disposable income plunged £40.38 per week in April, the largest fall since its Asda Income Tracker began in 2008.
Customers aged below 30 and above 75 were most significantly affected, it said.
Asda’s co-owner Mohsin Issa said the drop in consumer spending power illustrated ‘the stark reality facing millions of families’.
The chain recently invested £90million in its value Just Essentials range and in lowering prices. It also drafted in former Tesco executive Ken Towle as retail director.
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