The credit pact signed this month stipulates that Albertsons must in certain cases use all proceeds from sales of secured assets where the loan backing a property is more than 40 percent of the value to pay down debt, with the amount scaling down as the ratio decreases, said a person with knowledge of the deal who asked not to be identified because the terms aren't public.
Such detailed formulas are unusual and indicates Cerberus is divvying up the company's properties, according to Jonathan Insull, money manager at Crescent Capital Group, which oversees $10 billion of speculative-grade debt.
"Clearly, asset sales are part of the plan," Insull, whose company doesn't own any Albertsons debt, said in a telephone interview from New York. "It's definitely something they are focusing on."
Private-equity firm Cerberus, which owned Albertsons- branded stores before leading a group that bought about 870 Albertsons, Acme, Jewel-Osco, Shaw's and Star Market sites for $3.3 billion in March, may use proceeds from asset sales to help trim the retailer's debt of about $3 billion.
Standard & Poor's said in an April 25 report that the Boise, Idaho-based company's profits will show a "meaningful" drop over the next year as it fares worse than rival grocers amid "intense" competition.
Lenders provided a $1.15 billion term loan and two revolving credit lines totaling $1.4 billion to finance the Cerberus-led group's purchase of Albertsons, according to data compiled by Bloomberg. The company refinanced the initial term loan this month, reducing its borrowing costs, the data show.
Peter Duda, a spokesman for Cerberus who works at public relations firm Weber Shandwick, declined to comment on the financing or any plans for asset sales.
"We expect the amendment of the loan to decrease the company's borrowing costs, but the total debt amounts are unchanged," S&P said in its report.
Demand in the loan market from investors such as mutual funds and collateralized loan obligations has outstripped the supply of new debt, making it easier for borrowers to obtain more favorable terms.
Prices of junk-rated loans averaged 98.85 cents on the dollar on May 17, hovering near the highest level since July 2007, according to the S&P/LSTA U.S. Leveraged Loan 100 Index.
After completing the purchase, Cerberus carved out the Albertson banners and assets to combine them with the namesake stores it already owned from its acquisition of Albertsons in 2006. The two-step deal resulted in Cerberus controlling Albertsons, which owns the namesake brand, and New Albertsons Inc., which holds the other four chains.
The transactions left New Albertsons with "considerable" liabilities, including about $2.3 billion of senior unsecured notes, as well as significant lease and pension obligations, according to an S&P report from March 20.
S&P in April gave New Albertsons a CCC+ rating, seven levels below investment-grade, with a stable outlook. Albertsons has a B rating, five levels below investment-grade, with a "negative" outlook. S&P cited weak sales trends with operating measures likely to be worse than industry peers.
"It's a very tough business," Philip Zahn, a Chicago- based analyst at Fitch Ratings, said in a telephone interview.
The Cerberus-controlled chains compete against supermarket operators Kroger, Safeway and Royal Ahold.
Traditional supermarkets face competition from discount chains such as Wal-Mart Stores and Target as well as specialty stores like Whole Foods and Trader Joe's, he said. They are also competing with pharmacies including CVS Caremark Corp. that sell convenience foods in addition to over-the-counter drugs and beauty products.
S&P said in its report it expects profit at the Albertsons stores will drop over the next year because of shrinking gross margins as it seeks to keep prices low to compete for customers.
Albertsons is "highly leveraged" with its debt expected to be around 6.5 times adjusted earnings before interest, taxes, depreciation and amortization by early 2014, Charles Pinson-Rose, a New York-based analyst for S&P, said in a telephone interview. Kroger has a leverage ratio of 2 times and Safeway's is 2.8, Bloomberg data show.
A contraction in margins at New Albertsons will lead to a decline in adjusted Ebitda of about 25 percent in fiscal 2014, according to the March S&P report. The unit's debt level was expected to increase to around 9.5 times Ebitda over the next year, from around 8 times after the buyout.
The cost-savings reaped from the refinancing at Albertsons stem from a $450 million three-year portion that pays interest at the higher of 4.25 percent or 3.25 percentage points more than the London interbank offered rate, according to the person with knowledge of the transaction. The $700 million six-year piece pays 4.75 percent or 3.75 percentage points more than Libor, the person said.
The initial $1.15 billion three-year term loan paid interest at 5.75 percent or 4.5 percentage points over Libor, Bloomberg data show. Libor, the rate at which banks say they can borrow from each other, was set at 0.27 percent on May 17.
In the event that Albertsons sells assets, proceeds would first go to holders of the three-year portion and then to investors in the six-year loan, according to the person.
When the company's senior secured leverage falls below 3.5 times Ebitda, then the loan-to-value metric will dictate what portion of the sale proceeds will be used to pay down debt.
If the so-called LTV is 40 percent or less while staying above 30 percent, than 75 percent of the proceeds would be used to pay down the debt ahead of its maturity; an LTV of 30 percent or less would mean that half of the asset sales would be used to prepay lenders, the person said.
"You don't usually see asset sale provisions that are this highly negotiated," said Insull.
While Cerberus may sell assets acquired in the latest buyout of grocery store chains, S&P's Pinson-Rose said the firm will likely seek to improve operations by raising the quality of its fresh produce and meat, packaging and store presentation.
"Under the original deal they improved operation trends and then sold some real estate," Pinson-Rose said. "It was a gradual process. Not one big deal."
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