U.K. supermarket retailer J. Sainsbury Plc announced its plans to refinance GBP1.7 billion ($2.9 billion) of its unsecured debt through the securitization of at least GBP2 billion ($3.4 billion) in CMBS paper as two deals began marketing last week.
Eddystone Finance plc will securitize GBP1.2 billion ($2.09 billion) of 12-year floating rate notes with a call and step-up after seven years, which will be backed by 75 supermarkets that have a market value of about GBP2 billion. The transaction offers investors 617.1 million ($733.4 million) of 5.4-year notes and GBP420.8 million ($734.9 million) of seven-year notes with a 42% LTV. Two subordinated tranches rated double-A and single-A sized at GBP140.3 million ($245 million) and GBP220.4 million ($385.17 million) with 49% and 60% LTVs, respectively, are also on offer.
Longstone Finance plc securitizes GBP870 million ($1.5 billion) of 25-year fixed rate notes secured by 52 supermarkets with a market value of around GBP1.55 billion ($2.7 billion). Longstone Finance offers three fixed rate tranches, including: GBP542.4 million ($947.9 million) of 14.7-year triple-A notes; GBP46.5 million ($81.2 million) of 25-year double-A rated notes; and GBP278.9 million ($487.4 million) of 25-year, single-A rated notes. The three tranches are issued with 35%, 38% and 56% LTVs, respectively.
Both transactions employ a secured loan structure, typical of this type of securitization, market sources said.
The portfolios of supermarkets backing each deal are leased on a 30-year term with their note ratings not explicitly linked to Sainsbury's. The proceeds from the deals will be used to repay all of Sainsbury's outstanding unsecured debt and make a contribution to its pension plan. The company will reduce its annual interest cost by GBP12 million ($20.9 million) and cut its GBP582 million ($1.07 billion) pension deficit by more that half.
"Using [these] transactions as a blueprint, it is possible that other companies may look to unlock the value in their fixed assets and refinance their senior unsecured debt," analysts at Dresdner Kleinwort Wasserstein wrote. "Other U.K. retailers, for example, are no strangers to securitization, and the likes of Tesco and Marks & Spencer already have sale-and-lease-back CMBS outstanding."
Upside potential
Dresdner analysts said that if other companies followed Sainsbury's example, it would create further upside potential for European CMBS volumes that are expected to grow substantially this year.
Sainsbury is also looking to de-link its two existing sale-and-lease-back CMBS deals - Highbury Finance and Dragon Finance - from its existing Moody's Investors Service Baa3' rating. Moody's earlier this year placed the Baa3' rating of the Highbury bonds on review with direction uncertain. The agency placed the Baa3' rating of the Dragon Class A bonds on review with direction uncertain, and the Baa2' of the Dragon Class B bonds on review for possible downgrade.
"Because the Dragon Class B bonds are on review for possible downgrade, it's likely that the current Baa2' rating will be the ceiling for the new rating once these notes are de-linked," explained an analyst at the Royal Bank of Scotland.
The Highbury deal is backed by floating rate notes.
"The issue here is less about credit rating and more about the ability to get the notes repaid," the analyst said. "If the notes get de-linked, there will have to be some form of enhancement that insures a Sainsbury default does not stop payment on the notes."
The Highbury deal was issued in 2000 with an A1' Moody's rating. Buyers holding these notes have since seen the rating deteriorate to Baa3.'
The analyst said that most people expect that once the notes are de-linked, the Dragon Class A will remain locked in at Baa3' without the possibility of being upgraded if Sainsbury's current rating improves.
"De-linkage removes the downside potential, but it also removes the upside," the analyst said. "In the event Sainsbury were upgraded, the notes on these transactions would remain the same."
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