Unlock the Editor’s Digest totally free
Roula Khalaf, Editor of the FT, selects her favorite tales on this weekly publication.
Walgreens Boots Alliance’s shareholders are being provided a 63 per cent premium in the event that they promote to non-public fairness agency Sycamore Companions. However a few of the firm’s collectors could possibly be in line for the same bonanza.
Again when the pharmacy chain — which incorporates UK high-street stalwart Boots — boasted a market capitalisation within the tens of billions of {dollars}, it frequently issued extremely rated debt, making the most of low rates of interest. One bond in April 2020 got here with a 4.1 per cent coupon and a 30-year maturity. Just a few weeks in the past, these bonds have been buying and selling for simply 65 cents on the greenback, reflecting that modest coupon and Walgreens’ glum prospects.
Sycamore’s provide might save the day for these bondholders. Traders and attorneys are poring over paperwork to see what borrowings Walgreens can go away excellent, and which should be retired at face worth, to be refinanced with costlier paper. Basically, if Walgreens’ credit standing falls to “junk” standing, bondholders might pressure the corporate to purchase again the bonds at par.
Traders appear to suppose Sycamore shall be compelled to purchase them out as ranking businesses have already warned on downgrades. The worth of the 2050 notes has risen to greater than 90 cents. Sycamore, although, has its personal sport to play: the much less money Walgreens can spend on curiosity, the extra there may be to bolster its would-be proprietor’s fairness returns.
Sycamore’s disclosures to date recommend its financing construction is fairly aggressive. Out of an all-in value of $23.7bn, Sycamore is committing simply $2.5bn of fairness. Walgreens chair Stefano Pessina has pledged to rollover his current 17 per cent stake, price as a lot as $2.1bn.
Sycamore says it has secured roughly $20bn in agency debt and most popular inventory commitments from a sequence of huge banks and well-known personal credit score companies. Assuming that comes with a mean 10 per cent rate of interest, Walgreens wants to search out $2bn a yr. That’s about half of the money analysts count on its operations to generate in its subsequent monetary yr, after taking out capital expenditure, in response to LSEG.
There’s room for fancy footwork. A few of that debt is credit score traces that may not be drawn. Walgreens will attempt to promote belongings, which might reduce its money owed, though additionally sacrifice the connected money movement. It could additionally difficulty debt repayable in additional debt — so-called pay-in-kind loans, although these can change into expensive in the long term. Sycamore might even throw in additional fairness to keep away from the triggering debt downgrade.
Most definitely, Sycamore will simply purchase the present bonds again — and attempt to get the very best deal it may well issuing extra versatile, albeit costlier, debt. Shareholders, who’ve misplaced about two-thirds of their funding prior to now 5 years, will most likely be grateful to see a deal undergo in any respect — even when it’s a group of bondholders who take house the sweetest premium.
This text has been amended to replicate that Walgreens would want to search out $2bn a yr to service curiosity funds, not $200mn
sujeet.indap@ft.com
