Deutsche Bank, JP Morgan, Unicredit and Royal Bank of Scotland are said to be knocking on investors’ doors with£8.25 billion of unsyndicated loans left over from last summer’s buy-out of Alliance Boots. Until last month, there had been no market for such debt, especially following the Standard & Poor’s ratings downgrade in October.
On offer are£5 billion of senior debt, an£800 million credit revolver, a£1 billion loan against property assets,£400 million of receivables and a£1 billion junior ranking loan. Bids to Deutsche are said to be due by the end of this week.
Let us suppose the underwriting institutions were prepared to take a 9 per cent haircut on the junior debt and 7 per cent on the senior. Say 8 per cent overall or a£660 million write down – a nasty loss on one deal, but small beer compared with the sub-prime write-downs we read about each day.
For investors, this price cut and the opportunity to tie in a high fixed return when UK interest rates are heading down is tempting.
The catch is that financing sums are tight. Add in the£750 million of mezzanine debt already syndicated and the net debt on the balance sheet and you are looking at an estimated interest bill of some£750 million a year. Net cash generated by Alliance Boots’ operations in the year to March 2007 was£887 million.
Financial information since has been opaque and the projections this buy-out was based on are unlikely to have taken into account the 31 per cent cut in pharmacy dispensing fees imposed by Government in October or the severity of the consumer downturn.
The good news is that Alliance Boots is classically defensive. The bad news is that it is crying out for retail flair and higher investment in stores and logistics. It remains challenged structurally by supermarkets’ advance into its core categories.
Whether or not so much Alliance Boots paper can find a new home, the message for the rest of the sector is that financial markets are evolving. Many investors are in “bottom fishing” mood and we have seen opportunity funds launched to stimulate value among quoted property shares.
Where better to look next than among UK general retailers that have lost 45 per cent of their market value over the past year?
It is a long time since I have been positive about retail, but it’s time to start looking through the gloomy trading statements and putting money back in. There’s better value here than in the leveraged debt markets.
Whether or not so much Alliance Boots paper can find a new home, the message is that financial markets are evolving
No comments yet