(Bloomberg) -- Ocado Group Plc went a long way toward addressing a looming debt maturity wall with a new bond sale on Thursday. But it forked out for a chunky 10.5% coupon, more than three times what it currently pays, suggesting a much more punitive interest bill for the grocery delivery firm.
The British company sold £450 million ($576 million) of a five-year note, according to a person with knowledge of the sale, and the new bond was indicated higher on Friday at 102 pence on the pound. Shares in the company, however, dropped as much as 3.4%, underperforming a UK index.
The sale follows a rough couple of years for Ocado since the buoyancy of the pandemic era, with investors worrying it will struggle to contain costs and deal with £1.45 billion of debt maturing over the next three years. While it narrowed a pre-tax loss in the first half of this year, the coupon on its new bond is well above the average 3.125% of interest it pays on its outstanding debt.
“The company has flagged that it will be cash flow generative from the second half of 2026. As I understand it is inclusive of any increase in interest costs,” said James Lockyer, an analyst at Peel Hunt.
The high rate on the new debt is a reflection of the changed rates environment and also signals how perception around the e-commerce sector has shifted. Ocado has a coupon of just 0.875% on its existing convertible bond, while its senior unsecured note pays 3.875%.
Proceeds from the latest sale, along with a £250 million convertible note priced at 6.25% earlier this week, will go toward refinancing £600 million of the convertible bond due next year and £500 million of the senior unsecured notes due in 2026. The company could still lower its total debt load if it’s able to buy back those existing bonds at a discount.
“While the move extends Ocado’s maturity profile, it doesn’t appear to resolve the company’s liquidity issue entirely,” said analysts at Citigroup Inc. including Joseph McNamara and Monique Pollard, in a note before the sale.
The older bonds both currently trade at around 92 pence on the pound, data compiled by Bloomberg show.
Ocado’s convertible bonds have recovered recently on expectations the firm would be able to refinance its debt, after falling into what investors call “busted” territory, where the shares are considered highly unlikely to reach the price at which the bonds convert into stock.
An Ocado spokesperson declined to comment when contacted by Bloomberg.
Convertible Windfall
Ocado’s new convertible bonds issued earlier this week have already made an instant gain for buyers. They rose as high as 103 pence on the pound on Thursday, after pricing at 100 pence, while Ocado’s stock is down 13% this week.
One investor who bought into those bonds said that the move was to do with the pricing of the new high-yield note, as the convertible bonds priced at a slight discount to the levels implied by the initial marketing of the new notes.
The final pricing for the new deal was at the tight end of the initial range of 10.5% to 10.75%, with Ocado boosting the size by £100 million. BNP Paribas SA and Goldman Sachs Group Inc. were the lead bookrunners.
The company, founded by three former Goldman Sachs bankers, provides British customers with high-end groceries including from Marks & Spencer Group Plc. It sees its future as a maker of automated warehouses for supermarkets around the world, but demand from key customers has slowed.
--With assistance from Kit Rees.
(Adds bond and stock price moves.)
©2024 Bloomberg L.P.
