February 12, 2018 / 2:13 PM / 6 days ago

Banks line up approx $2.5 billion debt for EG’s Kroger buy

LONDON (Reuters) - Banks have lined up approximately $2.5 billion equivalent of leveraged loans to back UK forecourt operator EG Group’s acquisition of US grocery chain Kroger’s (KR.N) convenience store unit, banking sources said.

Kroger agreed to sell its nearly 800 convenience stores to EG Group for $2.15 billion, the US supermarket chain said last week, just days after EG closed a 2.85 billion euro equivalent loan financing to fund its acquisition of over 2,000 Esso sites in Italy and Germany and refinance existing debt.

Bank of America Merrill Lynch, Barclays, Morgan Stanley, Deutsche Bank and UBS are leading the latest debt financing and are expected to be joined by other banks, the sources said.

The financing will comprise around $1.9 billion of term loans, of which around $200 million will be denominated in euros, as well as approximately $500 million of second-lien loans, the sources said.

The loans will launch for syndication to institutional investors in the next two to three weeks and will mainly target US-based investors, the sources said.

EG Group’s existing 281 million euro equivalent multi-currency revolving credit facility is also set to increase, given the company has grown as a result of the acquisition, the sources said.

DEBT-FUELLED

The Kroger acquisition will be financed entirely with debt as EG Group’s existing credit agreement enables EG Group to do so.

“It shows that the company is extremely ambitious, doing the acquisition with no equity,” a syndicate head said. “Investors will be looking at the pro forma-ing very closely, they’ll look at pro forma and see if falls within existing docs. The owners have already taken out a big dividend and have very little left invested – does that feel like the right risk/reward?”

While some investors have expressed displeasure with a new financing launching so soon after the last financing closed, other investors are attracted to the opportunity of deploying further amounts of capital into a well-liked, strong performing credit.

    Although investors cant stop the company from funding the Kroger acquisition entirely with debt, they can choose not to invest in the new debt or sell out of their existing positions in the secondary loan market, sources said.

    However, EG Group’s term loans have remained fairly flat in secondary since the Kroger acquisition was announced, notwithstanding last week’s volatility from wider macro-economic conditions that saw a softening of many credits.

    “Some investors were not so excited to find out about a new deal so soon after an old deal, however, secondary has been stable which suggests buyside is supportive. By definition the company still needs to raise debt so that is the opportunity for the lenders to talk, but if lenders were really worried about the acquisition then secondary levels would have dipped,” a second syndicate head said.

    EG Group priced its 2.85 billion euro of loan facilities at the beginning of February. That deal included a 1.985 billion euro term loan B paying 400bp over Euribor with a 99.5 OID; a 400 million pounds term loan B priced at 475bp over Libor with a 99.75 OID; and a $500 million TLB priced at 400bp over Libor with a 99.75 discount.

    There was also a 385 million euro unfunded letter of credit paying 200bp over Euribor and a 281 million euro-equivalent multi-currency revolving credit facility paying 300bp over Euribor/Libor.

    All facilities have a 0 percent floor.

    TDR acquired a 1.3 billion pounds minority stake in EG Group, formerly known as Euro Garages, in January 2016, backed by a 745 million pounds financing split between a 370 million pounds seven-year TLB and a 250 million pounds equivalent euro-denominated TLB.

    Editing by Christopher Mangham

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