(Bloomberg) -- Kroger Co. has become the latest company that may be forced to buy back debt from investors after its attempt to purchase Albertsons Cos. was blocked by judges.
The grocer sold $10.5 billion of bonds in August to help fund the acquisition, of which four portions totaling $4.7 billion were subject to a special redemption clause if the purchase wasn’t completed by Dec. 31 or some later date the companies agreed to. Now that the acquisition has been blocked, Kroger could potentially have to buy back that debt from its bondholders.
Also in August, Kroger said that it was swapping at least $6.8 billion of Albertsons notes for new securities. That debt tender was contingent on the closing of the acquisition, meaning Kroger will likely no longer be swapping those notes for cash once the deal is officially terminated.
The spread on Kroger’s 4.7% notes due in 2026 narrowed by more than 20 basis points since the announcement. The other bonds that include redemption language saw their prices rally closer to 101 and their spreads narrow. Even before the ruling announced on Tuesday, the news was largely priced in to the bonds spreads as the outcome was broadly expected, according to CreditSights Inc. analysts James Goldstein and Noah Schucking.
There’s a “high probability” Kroger will use the remaining proceeds from the bond sale for an accelerated share-repurchase program, the analysts wrote.
Kroger’s deal is the second big acquisition this year to be blocked and likely spur a bond redemption. In October, Tapestry Inc.’s $8.5 billion acquisition of Capri Holdings Ltd. was blocked by a US judge. The maker of handbags subsequently said it was buying back $6.1 billion of bonds it had sold to fund the planned purchase.
Recently, larger M&A transactions have been subject to a lot of scrutiny, in addition to higher financing costs, said Scott Kimball, chief investment officer at Loop Capital Asset Management.
“In short, if you’re an event-driven investor playing on the debt side of the capital structure, you have to assign a higher probability to deal risk,” he said. “That means being pickier about the price or yield at which you’re acquiring the bonds.”
For Tapestry’s bondholders, the result was, in many cases, losses. The bonds the company was buying back had been originally sold in November 2023. Market yields broadly fell this year as the Federal Reserve started cutting rates, pushing the prices of many of these bonds higher — for example, the 7.85% notes of 2033 were above 109 cents on the dollar in early October. Tapestry said it was buying those bonds back at 101 cents, the level it was entitled to purchase them at under the terms of the notes it sold.
In the case of Kroger, bondholders will probably reap small gains. The bonds were sold in August, and prices are closer to face value, meaning investors will get a slight premium for selling at 101 cents on the dollar. The longer portions of the $10.5 billion bond sale in August weren’t subject to mandatory redemption if the acquisition fell through.
Kroger could still appeal decisions to block the merger, but that appeal could take a while and would likely still result in a redemption given the Dec. 31 deadline.
Albertsons, on Wednesday, said it filed a lawsuit against Kroger, claiming it failed to exercise “best efforts” and take “any and all actions” needed to secure regulatory approval for the companies’ proposed $24.6 billion deal.
©2024 Bloomberg L.P.