Morrisons’ owner shields £6.5bn debt pile from rising rates

Clayton, Dubilier & Rice locked in lower interest levels on its acquisition borrowing earlier in year

THE Wall Street investor that owns Morrisons has taken the unusual step of shielding the supermarket’s £6.5bn debt pile from soaring interest rates, as climbing borrowing costs put pressure on leveraged buyouts.

Clayton, Dubilier & Rice (CD&R) locked in lower interest rates during the spring and summer months on its acquisition debt, according to City sources, anticipating that central banks would be forced into steep rate rises.

Three quarters of Morrisons’ bonds and bank loans are now either fixed or hedged.

Typically companies would not seek to fix interest rates on acquisition loans, preferring instead to wait until investment banks have refinanced the debts.

However, investment banks have been unable to offload all of the loans linked to the deal, as debt markets dry up ahead of an anticipated recession. This has forced CD&R’s hand, prompting it to seek protection from rising rates.

The unusual move is designed to avoid profits being wiped out by rocketing interest payments as bosses battle to regain ground lost by Morrisons to rivals over the past year.

Morrisons has faltered since being acquired by CD&R in a deal worth £10bn in October last year.

It was Britain’s fourth biggest supermarket when the deal was struck but the Bradford-based company has been overtaken by German discounter Aldi in recent months.

Sales at Morrisons fell by 4.1pc in the 12 weeks to Oct 30, according to Kantar. Its market share has dropped from 10pc to 9pc over the last year.

The supermarket’s plight has led to the growing expectation that CD&R would be forced to either inject fresh capital or offload the business.

Amazon, which has worked closely with Morrisons for more than five years, has repeatedly been linked with a possible bid for the business.

Sources close to CD&R admitted that the first year owning Morrisons had not gone smoothly but insisted that there was ample liquidity in the business to avoid the need for a capital injection. They dismissed concerns that the business’s profits would be squeezed by rising interest rates.

CD&R locked in lower interest payments earlier this year, benefiting in particular from much lower rates on euro-denominated loans, sources added.

Some £3.5bn of its debt has been refinanced into fixed-rate bonds. A further £2bn of loans either remains with the original 19-strong syndicate of lenders that funded the acquisition a year ago or has been sold at a discount on the secondary market.

Fortress Investment Group, which was beaten by CD&R in an auction for Morrisons, is believed to be among the investors that have bought a portion of the debt.

Investment banks, rather than Morrisons, are on the hook for any losses made on selling the debt at a discount. However, Morrisons is responsible for interest payments.

Morrisons also has a £1bn revolving cash flow facility – a corporate version of an overdraft – that is fully undrawn.

CD&R and Morrisons declined to comment.

Ratings agency Moody’s has previously estimated that less than half of Morrisons’ debt was either fixed or hedged.