Pricing on the $2.5 billion commercial paper backstop for Pleasanton, California-based Safeway Inc. has raised eyebrows in the investment-grade community as some lenders say the pricing -- LIBOR plus 1/4% -- is stingy. As first reported on LMW's Web Site last week, Bank of Nova Scotia, administrative agent, and Bank of America, have signed on with a combined $400 million, according to a banker familiar with the deal. Those commitments come in on top of $250 million commitments from co-arrangers Deutsche Bank and J.P. Morgan Chase. Melissa Plaisance, senior v.p., finance at North America's largest food retailer, said that the price increases to 60 basis points if Safeway uses one-third of its lines and up to 90 basis points if more than two-thirds are used. She added that no problems are envisaged with filling the deal. She declined to comment further on a deal in progress. Syndication of the deal, launched two weeks ago, has May 22 pegged as the target date for close.
Despite the grid, one banker said pricing is tight. "Safeway will have to really push on its relationship banks to get this done, as pricing is very low," he said. Another banker, however, noted that bonds and bank debt in the supermarket sector traditionally trade a lot tighter than ratings suggest. Moody's Investors Service rates the company's senior unsecured debt Baa2. "Supermarkets weather cyclicality very well, cash flow is strong and even if leverage increases because of an acquisition, it does not take long to put the house in order," the banker said. Safeway also requires cash management, asset management services and does capital markets business, leading to very strong relationships with banks. The deal could be done off a large club of relationship banks, he said.
The proposed credit already has undergone adjustments. Originally set at $3 billion, split between a $1 billion one-year and $2 billion multi-year credit, a visit to the bond market meant Safeway did not require a $3 billion loan. Now the deal is split between a $1.125 billion, 364-day revolving credit and a $1.125 billion five-year revolver. A banker noted that the yield is much better on a shorter tenure. There is also a $250 million two-part credit line denominated in Canadian dollars. The 364-day line carries a fee of eight basis points on unused portions, while the five-year has a fee of 10 basis points.
One banker said pricing was low compared to the deal for Kroger Co., another supermarket company. That credit, arranged by Citibank and J.P. Morgan Chase, is a $1.625 billion deal priced at LIBOR plus 3/4%, with facility fees of 12.5 basis points and 15 basis points on the one-year and five-year tranche, respectively. However, an official familiar with the Safeway deal said Kroger has an existing facility under subsidiary Fred Meyer Inc. that is thinly priced. The new deal compensates bankers on that, she said, adding that Safeway historically has better ratings than Kroger. Officials did not comment by press time. Officials at the lead banks either declined to comment or did not return calls.