Six of Europe's biggest food retailers have had their credit ratings downgraded or put on watch negative in the last 12 months. And many supermarket issuers fear this will push spreads even wider. But the sector is fighting on. Two new borrowers joined the market in 2000 and issuance in the industry has accelerated by nearly 30% on 1999. But the downgrades have taken their toll. Koninklijke Ahold (Ahold) burst into the MTN market in May last year and finished as 2000's top issuer in the sector with $2.06 billion outstanding off nine trades. But after being downgraded from A3 to Baa1 in October last year, Klaas Springer, treasurer at Ahold, has complaints. He says: "Of course it has been difficult because of the general spread widening that has happened in the market. When we are talking about five-year issues the downgrade cost us 10 to 20 basis points. It is significant, that's for sure." And Springer is not alone in his discontent. Safeway was downgraded from A- to BBB+ by Standard & Poor's in November 2000 and Simon Lane, director of corporate finance at Safeway, is unhappy with the rating agency's decision. He says: "We were not supportive of the downgrade and feel that we are stronger now than we were one year ago. Our downgrading has added a few basis points to our funding. But we are split rated. Obviously if there is a flight for quality then we will suffer. S&P incorporate earnings multiples into their rating assessments and we fell below the hurdle on that score. But we will get there in the end and they will upgrade us." It is the widespread consolidation in the sector that has put pressure on the issuer's credit. Over-concentration in Europe has meant that companies have expanded into Latin America and Asia, where cost-efficient hypermarkets are a novelty. Carrefour has spread itself the widest and now relies on its home market for only 47% of its sales. And after a string of cross-border acquisitions Ahold is now the world's fifth largest grocer. And this trend looks set to continue. Wal-Mart, the world's biggest retailer is tipped as a bidder for the German group, Metro and Sainsbury's is rumoured to be on Ahold's shopping list. Lane, at Safeway, explains the trend but is not convinced it will be ongoing. He says: "There is an over-concentration in the sector. Too many players are chasing a mature market. Consolidation is one way of getting scale in a saturated sector. But I do not think that this will carry on. The spotlight has come off the sector. Domestic UK players have enough on their plates and any UK consolidation would be subject to regulation." But Fergus Kiely, head of MTNs at HSBC, which lead-managed the highest number of trades in the sector, is confident that the industry will not suffer as a result of weakening credit. He says: "In the face of recent downgradings it has to be remembered that supermarkets are a defensive credit. Looking at it from Joe Public's perspective, if you have to cut back on spending you will lose the new car rather than the food for your belly. On this basis it's safe to assume a floor on the credit." The sector's slip down the credit curve also explains investor's penchant for vanilla trades. Kiely believes that the exposure to credit risk in the market has meant that investors are reluctant to apply further risk. He says: "Investors have had to gain an understanding of the credit market and as a result of this have diversified their geographic base. Whilst taking exposure to credits they have shied away from taking additional exposure through the use of embedded options." This is true of Carrefour and Ahold. Both issued all of their trades in plain vanilla last year. Springer at Ahold, says: "In terms of maturities we have issued a five-year trade, a seven-year trade, some one-year trades and a three- and six-month trade, which were for bridge financing. They are all plain vanilla notes. We definitely prefer plain vanilla." An official from one of the top European supermarkets complains that the size of the treasury and work pressure is a deciding factor in the choice between plain vanilla and structured trades. He says: "The lack of structured trades is quite general. Anything too exotic and people do not understand it. We do not make a conscious decision not to issue structured trades but we are a small team and anything highly structured must be approved by the board. That takes time." But things are looking healthy for the supermarkets. Compared to the same period last year issuance in 2001 is four times greater and stands at just under $300 million. Matthieu de Bergeyck, group treasurer at Carrefour, predicts the issuer's next 12 months. He says: "We will be quite opportunistic. Our debt maturities are not that long. We'll have some benchmark issues towards the end of the year. We will do some short-end trades too, but it depends on conditions." And the acquisitive Ahold will base its issuance on future purchases. Springer at Ahold says: "Since we signed our Euro-MTN programme between 50% and 70% of our new debt has been raised off the programme. In the future all our funding in Europe will come off our MTN facility. But it does depend on acquisitions. If we acquire more European businesses we will use the shelf extensively. If acquisitions take place in the US we will use Yankee funding."
February 16, 2001
