Morrison credit under fire

A quiet day in the credit markets was enlivened by news on struggling UK supermarket chain Morrisons.

Reports today indicated that the founding family of Morrisons, which owns about 9.5% of the stock, has approached several private equity houses about a possible buyout. The reports indicate that the family's efforts so far have been unsuccessful due to concerns about declining market share and the relatively large size of the potential deal.

But the reaction in the credit markets suggests that investors give the reports some credence. Safeway Ltd, which is the Morrison group entity that trades in the CDS market, saw its spreads widen 23bps to 130bps. They have now widened 50bps since the beginning of the year, making it the worst performer in the Markit iTraxx Europe by some distance.

However, a buyout isn't the only possible shareholder-friendly action that is sending spreads wider. Reports last month stated that hedge funds are pressuring Morrisons' management to realise the value on its extensive property portfolio through sale and leaseback agreements. The proceeds would be assumingly returned to shareholders. Morrisons is conducting a review of its property assets, with the result due next month. It would be no surprise to see further volatility in the meantime, particularly as Safeway is one of the less liquid credits in the Markit iTraxx Europe.

Debt issued by Wm Morrison is guaranteed by Safeway, but there are question marks around the strength of the guarantee and therefore over the deliverability of the bonds into a CDS contract. This has had a knock-on effect on liquidity.

There was little movement in the broader credit markets, with both the Markit iTraxx Europe and Markit CDX.NA.IG losing ground towards the European close.

Download full article