A definitive agreement with Cerberus Capital Management LLP was announced on January 11, 2013 (see transaction summary below). As part of the Cerberus transaction, the 2014 bonds are expected to be called and refinanced with a new SVU bank facility. This is expected to occur upon closing, 1Q 2013. The bonds are callable at par and are currently trading to the call. For this reason we remain NEUTRAL.
The 2016 notes have traded up approximately 2 points on news of a definitive agreement. The bonds have a 8% yield for what appears to be two year risk. This is a $1.0bn issue. It trades with this yield due to refinancing risk. We expect the bonds to remain at this level until the "new SVU" shows a turnaround and access to the capital markets. For this reason we remain NEUTRAL.
The American Stores bonds will be cash collateralized and are trading accordingly.
The Albertson bonds lack a change of control and therefore will travel to the "New Albertson's" entity. Given the lack of protection proved by the Albertson indentures, we expect Cerberus to keep the bonds outstanding and layer senior secured debt on top of the bonds resulting in structural subordination. With long maturity dates and a lack of covenant protection, the bonds are a "cheap" form of equity for Cerberus. As a result we expect the bonds to continue to trade wide, reflecting structural subordination. This transaction does remove the overhang of a potential "strategic filing" of Albertson's by Supervalu, and allows holder to "kick the can". At this time we do not have financials on the New Albertson's entity so we are unable to provide relative value commentary.
S&P has placed Supervalu Inc. ratings on CreditWatch positive while Fitch reaffirmed at CCC. In their announcement, S&P commented "the CreditWatch listing reflects our opinion that the sale transaction, if completed as proposed, will result in modest decline in leverage for SUPERVALU, with total debt to EBITDA possibly below 5.0x on a proforma basis from our expectations of 5.3x in fiscal 2013 (please note S&P includes pension and other liabilities in their calculation of total debt).