Tesco closes £450m UK supermarket CMBS
By James Wallace - Thursday, January 26, 2012 15:39
Tesco, the world’s fourth largest retailer, has sold a 50% stake in an 11-strong portfolio of UK supermarkets financed by a 30-year dated £450m credit-linked CMBS transaction which closed this afternoon.
As part of the deal Tesco has completed one of the largest sale and leasebacks in recent years with an undisclosed, non-traditional property investor.
The bonds, with an expected maturity of 22 and-a-half years, priced today at 275 basis points over the 4.25% 2032 gilt benchmark, with the coupon set at 5.66%.
HSBC, Goldman Sachs, The Royal Bank of Scotland and Lloyds Banking Group were joint arrangers on the deal, with the bonds thought to be oversubscribed.
UK accounts took 96% of the bonds, with the balance overseas. Around 78% of the investors were fund managers, 18.5% insurance companies and 3.5% others.
The sale-and-lease back of the portfolio was sold to Tesco Stores Limited, a 50:50 limited partnership comprised of a subsidiary of the supermarket giant and a third party investor.
The joint venture partners are financing its acquisition of the £440.5m-valued supermarket portfolio by issuing a single-tranche, 30-year amortising loan that will amortise by the end of 2041 from a newly-created special purpose vehicle, Tesco Property Finance 5.
The 11 occupational leases each expire on Christmas Eve 2041, after the October 13 bond maturity date of the same year. The portfolio security will also be credit linked to Tesco PLC which also acts as guarantor to Tesco Stores Limited.
The whole loan LTV is 102.2%, with the estimated £9.5m above portfolio value likely to cover transaction and arrangement costs.
The occupational leases on the underlying portfolio will finance the interest payment to bondholders, with a swap taken out to mitigate the risk that rental income could fall short of fixed interest due over the life of the 30-year securitised loan.
The portfolio is comprised of 11 UK-wide supermarkets which range in value from £13.88m to £71.69m, including stores across London, Blackburn, a 116,793 sq ft Bradford supermarket, a 101,976 sq ft Doncaster Tesco’s as well as stores in Rotherham and Great Yarmouth (see table below) with the largest five assets reflecting 61.1% of the portfolio’s total market value.
The largest single asset is the portfolio’s only supermarket still under construction, at Woolwich (artists' impression pictured), reflecting 16.3% of the pool by market value, which is scheduled to be completed this November.
The developer, Spenhill Regeneration, a 100%-owned Tesco subsidiary, is working to a fixed price construction contract with performance and completion guaranteed by Tesco PLC. Rental payments for the supermarket will begin in December 2012 and continue thereafter until lease maturity in 2041, regardless of whether the property has completed or opens on schedule.
Around £23.8m of the issue proceeds will be retained and preserved, representing 103% of the expected costs of completing the development of the property at Woolwich including fees to developers and advisers. The development risk is entirely borne by Tesco PLC.
Once completed, the development will comprise a 179,000 sq ft Tesco Extra store, seven retail units, 613 car-parking spaces for the superstore, 259 residential apartments and 78 car spaces.
Securing property substitutions will be allowed subject to, inter alia, equivalent market rent of exchanged collateral, lease term and rental income at least equivalent as well as maintaining a broad similar geographic concentration.
This is Tesco’s fifth credit-linked CMBS, which in aggregate amount to £3.05bn since 2009, with three of the previous deals sold to Tesco’s own pension fund and the fourth sold to USS’ pension fund.
Tesco remains one of the world’s largest and property developers and managers, with global property assets worth £36bn, against a book value of just under £21bn.
From this financial year onwards, Tesco intends to deliver profits of between £250m and £350m per year, broadly achieved through around £1bn in annual supermarket sales which the retail giant argues is sustainable given a circa £2.5bn yearly investment in land and buildings. As a result, Tesco will continue to grow its net asset base, despite the disinvestment strategy.
jwallace@costar.co.uk
