Credit-default swap spreads on Tesco and J Sainsbury widened last week after a U.K. government decision that the grocers could not take over Safeway. Five-year protection on Sainsbury jumped to 57 basis points on Wednesday from 44.5bps the week before. Tesco widened to 20bps from 18bps in the same period, according to traders.
The decision hit the market on Sept. 26 when Patricia Hewitt, trade and industry secretary, announced she had accepted the Competition Commission's recommendation that it would be against the public interest for Asda, Sainsbury or Tesco to take over Safeway. This paves the way for a take over by Morrisons.
Giulio Lombardi, corporate analyst at Fitch Ratings in London, said it identified Sainsbury as the entity that would come off worse as soon as talks of a Safeway merger began. Because of that it downgraded Sainsbury to single A and placed it on negative watch in March. If Sainsbury had bought the ailing supermarket chain it would have needed to issue more debt and spend a lot of money on revamping Safeway and its distribution infrastructure.
The Morrisons and Safeway merger will strengthen two competitors that could put pressure on Sainsbury, noted Lombardi. The increased pricing power of the combined entity will put it on a more level footing.
Lombardi said Fitch Ratings will watch how Sainsbury fairs in the more competitive environment before altering its credit rating or taking it off negative watch.
Five-Year Protection On J Sainsbury