A report from news agency Reuters claims that Walmart, the world’s largest retailer, has been in discussions with potential buyers Apollo, Lonestar and TD&R for some time and is set to make a decision shortly on whether they will push on and get the deal done or put the process on hold.
Walmart has been looking to sell a portion of Asda after it failed to combine it with Sainsbury’s last year.
Banks would typically jump at the chance to fund a headline-grabbing, jumbo buyout, but financing any deal could prove problematic in the current climate as risk-adverse lenders have all but stopped underwriting leveraged financings due to the coronavirus.
Jumbo buyouts are backed with underwritten commitments of debt from banks, which are then sold in a syndication process to a wide number of investors including CLOs and credit funds. With investors focused on their current portfolios, it could be risky for banks to take on such a commitment without knowing who the end buyers are and at what levels they would be willing to buy.
Several deals that were underwritten and due to launch for syndication in March, including a €1.5bn financing backing Lonestar’s acquisition of BASF’s construction chemicals business and a €520m leveraged loan for Ardian’s acquisition of Cerelia, a French company that makes pizza dough and cookies, were delayed with banks left holding the paper.
Sponsors have held talks with banks about financing a stake in Asda and there is the willingness from a large number of banks to try and do the deal and get the pipeline going.
“Sponsors are approaching banks about whether a financing is possible and banks are trying to work through it. Although primary is notionally shut, if something were to come with a significant yield it could get done,” a senior banker said.
A second senior banker said: “Everyone in the market is looking at it.”
Bankers would need to seek approval from intrinsically risk adverse credit committees for around 3.0 times Asda’s approximate £1.2bn Ebitda. Some bankers are willing to look at up to 3.5 times.
While sterling is a less liquid currency and retail is seen as a tricky sector, at 3.0-3.5 times it is still relatively lowly leveraged compared to what would be offered in pre-coronavirus market conditions, when leverage of 4.0-4.5 times would have been on the agenda.
“Because it is very large and sterling this is not a maximum leverage deal and the ask is going to be circa 3.0-3.5 times. If coronavirus wasn’t around it could sustain higher than that. Credit committees right now are exceptionally cautious because of the volatility and unpredictability of the underlying markets,” the first senior banker said.
Any sponsor wanting to do this deal will also have to pay up for the debt. Sterling has always come at a premium of around 50bp-100bp to euro and dollar debt but with sterling having paid around 475bp at the start of 2020, there would now be a premium on that pricing of an extra 50bp-100bp at least, several bankers said.
Banks typically have 125bp of flex in any deal allowing them to increase pricing of an interest margin or original issue discount to tempt investors into a deal. However, banks willing to fund this deal are expected to ask for substantially wider flex language to protect them. Documentation will also be more relaxed in a bid to make it more appealing to investors.
One option would be to underwrite the deal in euros and offer a sterling carve out on a best efforts basis. If the sterling didn’t sell as there are fewer sterling buyers, then the banks would have the flex to increase the euro portion.
“Sponsors will recognise they have to pay up to do a deal in the current market and be open minded, docs cant be as aggressive either,” the first senior banker said.
The second senior banker added: “We are spending a little bit of time on it but we are not sure what to make of it in this market. Lower leverage, higher fees, higher flex are all needed but the question is that even if you do all of that, does it really matter? You can price it up but if you underwrite a meaningful size in market you need to make sure there is a market to sell it to, otherwise fair value doesn’t matter.”
Asda and Walmart were not immediately available for comment.
Asda and Walmart said in a joint statement on February 26 that discussions with “a small number” of suitors followed “inbound interest” but no decisions had been taken.
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