(Bloomberg) -- UK firms selling pints of beer, frozen peas and chicken are facing a race against time to refinance billions of pounds in junk bonds as Britain struggles to get a grip on the economy.
Companies including the UK’s biggest pub group, frozen foods supermarket Iceland Foods and poultry producer Boparan Holdings Ltd. have about £14.3 billion ($17.8 billion) of high yield bonds maturing in 2025, according to data compiled by Bloomberg. The implied cost of refinancing those bonds is about double what companies are currently paying to service the debt.
Borrowers will need to act soon, because they risk ratings downgrades and loss of access to banking facilities if their debt gets into its last year.
The pain point is coming as the UK looks increasingly like an outlier in the global quest to get rising prices under control. Investors expect more Bank of England rate hikes, and that’s pushed the gap between an index of sterling junk bonds — mainly made up of British firms — and its euro counterpart to a four-month high.
Staffing shortages and Brexit-related supply-chain issues are also adding to the challenge for consumer firms with big debt loads, while soaring mortgage rates and a cost-of-living crisis are pressuring customer budgets.
“Some of those issues are everywhere, but I think the UK is more exposed than most European jurisdictions,” said Kyle Kloc, high-yield portfolio manager at Fisch Asset Management. “Consumer-facing companies will face difficulties on top of the high interest rates and financing costs.”
Some have already started taking action to deal with their looming debt maturity wall.
EG Group, the filling station and convenience store chain owned by the Issa brothers and TDR Capital, agreed to sell its UK and Ireland gas-station business to Asda, another business owned by the billionaire brothers, in a move to help it refinance debt coming due in 2025.
EG Group and Boparan declined to comment. Iceland Foods didn’t respond to a request for comment.
Stonegate Pub Co. may also look at asset sales in order to pay off some of its debt, Bloomberg reported earlier this year. The company, which became Britain’s biggest pub group after buying rival Ei Group just before the pandemic, has £2.2 billion-equivalent of bonds coming due in 2025. A squeeze on customers’ budgets and soaring energy costs have also hit the hospitality industry hard.
Stonegate continually evaluates options to maximize shareholder value, and the disposal of some pubs remains one of a number of options, a spokesperson said. There is no pressure to sell as the group remains well-financed, they added.
Some bondholders are urging UK borrowers to take action sooner rather than later.
“Companies will have to deal with them this year,” said Azhar Hussain, head of global credit at Royal London Asset Management. They “can’t leave it, given the size of the issues. Trying to save a little on interest costs doesn’t make sense when this maturity wall is coming up.”
To be sure, junk-rated issuers across Europe are in a race against time to refinance, with market volatility making it more difficult to tap investors. But British companies are in a particularly precarious position, given the higher sterling borrowing costs and prospect of higher-for-longer rates.
Britain’s inflation rate remained much stronger than expected in April, at 8.7%, the highest among Group of Seven economies.
Among other UK companies with bond issues coming due in 2025 are telecoms company TalkTalk Telecom Group Plc, which has £685 million worth of notes due in 2025 that are now trading at 78.6 pence on the pound. The company declined to comment.
NOTE: To analyze the amount of UK firms’ high-yield debt due to mature in 2025, Bloomberg News used the SRCH function, selecting active, non-investment grade corporate bonds — excluding financials — denominated in sterling, US dollars or euros with the UK as their country of risk.
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