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Walgreens Boots Alliance’s shareholders are being supplied a 63 per cent premium in the event that they promote to non-public fairness agency Sycamore Companions. However a few of the firm’s collectors may very well be in line for the same bonanza.
Again when the pharmacy chain — which incorporates UK high-street stalwart Boots — boasted a market capitalisation within the tens of billions of {dollars}, it usually issued extremely rated debt, profiting from low rates of interest. One bond in April 2020 got here with a 4.1 per cent coupon and a 30-year maturity. A couple of weeks in the past, these bonds had been buying and selling for simply 65 cents on the greenback, reflecting that modest coupon and Walgreens’ glum prospects.
Sycamore’s supply may save the day for these bondholders. Traders and attorneys are poring over paperwork to see what borrowings Walgreens can go away excellent, and which have to be retired at face worth, to be refinanced with dearer paper. Basically, if Walgreens’ credit standing falls to “junk” standing, bondholders may pressure the corporate to purchase again the bonds at par.
Traders appear to assume Sycamore might be compelled to purchase them out as ranking companies have already warned on downgrades. The value of the 2050 notes has risen to greater than 90 cents. Sycamore, although, has its personal recreation to play: the much less money Walgreens can spend on curiosity, the extra there’s to bolster its would-be proprietor’s fairness returns.
Sycamore’s disclosures to date counsel its financing construction is fairly aggressive. Out of an all-in price of $23.7bn, Sycamore is committing simply $2.5bn of fairness. Walgreens chair Stefano Pessina has pledged to rollover his present 17 per cent stake, value as a lot as $2.1bn.
Sycamore says it has secured roughly $20bn in agency debt and most popular inventory commitments from a sequence of enormous banks and well-known non-public credit score companies. Assuming that comes with a median 10 per cent rate of interest, Walgreens wants to seek out $2bn a 12 months. That’s about half of the money analysts count on its operations to generate in its subsequent monetary 12 months, after taking out capital expenditure, in keeping with LSEG.
There’s room for fancy footwork. A few of that debt is credit score traces which may not be drawn. Walgreens will attempt to promote belongings, which may minimize its money owed, though additionally sacrifice the hooked up money movement. It could additionally situation debt repayable in additional debt — so-called pay-in-kind loans, although these can develop into expensive in the long term. Sycamore may even throw in additional fairness to keep away from the triggering debt downgrade.
Probably, Sycamore will simply purchase the prevailing bonds again — and attempt to get one of the best deal it will possibly issuing extra versatile, albeit dearer, debt. Shareholders, who’ve misplaced about two-thirds of their funding previously 5 years, will most likely be grateful to see a deal undergo in any respect — even when it’s a group of bondholders who take house the sweetest premium.
This text has been amended to replicate that Walgreens would want to seek out $2bn a 12 months to service curiosity funds, not $200mn
sujeet.indap@ft.com