(Bloomberg) -- The owners of Asda Group Ltd. are considering piling debt onto the supermarket chain to raise the money to buy Boots, another fixture on U.K. high streets.
Brothers Zuber and Mohsin Issa, alongside TDR Capital LLP, have discussed saddling the supermarket with as much as 4.5 billion pounds ($5.6 billion) of additional debt, on top of the multi-billion pound package that funded the firm’s buyout last year, according to several people with knowledge of the matter who asked not to be identified because the talks are private.
The new debt will go toward the approximately 7 billion-pound asking price for Walgreens Boots Alliance Inc.’s international drugstore unit and could come alongside other, riskier forms of borrowing to reduce the brothers’ and TDR’s equity contribution, the people said. They are also considering selling off Asda assets to raise the money for the equity stake, they added. The Issa brothers and TDR declined to comment.
Asda’s owners will look to use loopholes in the supermarket’s existing financing documentation and space within its permitted debt baskets to raise the additional cash, the people said. The supermarket chain has already deleveraged since its buyout, the people said, so it will be able releverage again. By combining earnings with Boots, Asda will be a much larger entity than it already is, enabling it to carry more debt.
At least three of Asda’s existing creditors contacted by Bloomberg weren’t aware of the plans under consideration to raise additional debt on the company. And it’s unclear whether Asda will maintain its BB credit rating if it introduces this additional financing to purchase Boots.
Bid Deadline
Bids for the sale are due by May 16 and potential buyers, including a joint bid by Apollo Global Management with Mukesh Ambani’s Reliance Industries, are in talks with lenders about how to finance their bids. The debt deal will likely total around 3.5 billion pounds, and the expectation is that under this ownership, Boots will eventually look to end up as an investment-grade or near investment-grade asset, the people said.
Apollo declined to comment, and Reliance didn’t immediately respond to a request for comment.
Private equity firm Sycamore had also previously expressed an interest, but a number of other bidders dropped out earlier this year as the outlook for U.K. retailers darkened. It has only deteriorated since then.
Any potential winner is also likely to come up against the capacity constraints of the European debt markets given the size of the financing and the need for sterling, a more illiquid currency compared with euros or dollars. Lenders will be looking to include dollar-denominated debt on Boot’s financing, to tap into a far deeper market, the people said.
With Asda’s existing secured bonds yielding between 7% to 7.5%, that is a being used as a minimum reference point for pricing any new debt. The financing could be more expensive, given where the market is pricing new issues, having recently reopened for business after being closed for months due to the fallout caused by Russia’s invasion of Ukraine.
Some lenders are working on one of the bids while others are working on both, the people said. Despite a contrast between the two, both could come up against capacity constraints. In both scenarios, private credit funds could provide a portion of the financing, to help combat any liquidity constraints, the people said.
Some banks have been caught up in the ongoing Wm Morrison Supermarkets PLC saga, where the process of selling down a 6.6 billion pound debt financing to back its buyout has all but wiped out the banks fees and then some. Banks still have around 2.7 billion pounds of debt to de-risk from Morrisons.
The billionaire Issa brothers have also expressed interest in McColl’s Retail Group, a U.K convenience chain that’s close to collapse.
(Adds detail on Asda’s debt structure)
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