24th Feb 2006 10:00
Sainsbury(J) PLC24 February 2006 24 February 2006 Proposed new long-term financing - issue of two Commercial Mortgage BackedSecurities (CMBS) Highlights • Proposed refinancing to raise up to £2.07 billion of secured debt, expected to be highly rated (5) • Buy back up to £1.7 billion outstanding unsecured bonds rated BBB- (S&P) and Baa3 (Moody's)(6) • Agreed with pension schemes' trustees a one-off contribution of £350 million into pension schemes • CMBS will be secured indirectly against 127 supermarkets with investment value of £3.55 billion (7) representing approximately half the net book value of Sainsbury's supermarkets • Operational flexibility maintained over secured properties, which remain on balance sheet • Group interest costs (8) are estimated to reduce by up to £12 million per annum from 2006/07 • Estimated one-off costs of £37 million pre-tax (£17 million cash) in 2005/ 06 J Sainsbury plc has today announced plans to raise new secured debt of up to£2.07 billion. Simultaneously, the company is offering to purchase itsoutstanding unsecured bonds totalling £1.7 billion and make a one-off grosscontribution of £350 million into the company's pension schemes. The proposedfinancing will involve the issue of two highly rated CMBS, which will be securedindirectly (5) against approximately half of the net book value of Sainsbury'ssupermarket portfolio. The CMBS market has developed rapidly over the past few years, with improvedliquidity and depth of investor participation. The CMBS structure enablesSainsbury's to raise finance at a lower cost than currently available in theunsecured credit market and provides the company with a flexible financingplatform for the future. The net effect is an estimated interest saving of up to£12 million per annum from 2006/07. Sainsbury's has agreed with the company's pension schemes' trustees to use someof the new funds arising from the refinancing to make a one-off contribution of£350 million into the pension schemes which, together with additional annualdeficit payments, are designed to fund the last reported deficit of £582million, calculated under IAS 19 as at 8 October 2005. Further details arecontained in a separate announcement released today. Commenting on the proposed transaction Darren Shapland, chief financial officersaid, "These proposals provide us with cost effective long-term finance byunlocking value from our property portfolio. We are retaining ownership ofthese valuable assets and keeping them on our balance sheet. In addition wewill maintain significant operational flexibility as we will have the right tosubstitute, withdraw or dispose of properties. The proposed refinancing willreduce our annual interest costs and enable us to inject a substantial sum intoour pension fund. This improves the long term funding profile of the businessand provides a flexible financing platform for the future as well asunderpinning the Making Sainsbury's Great Again plan as we continue to improveour offer to customers." Enquiries: Investor relations Media +44 (0) 20 7695 7162 +44 (0) 20 7695 6127Lynda Ashton Pip Wood --------------------------------------------------------------------------------A conference call will be held for analysts and investors at 10:30 (GMT) onFriday 24 February 2006. To listen to this conference call: please dial +44 (0)20 7365 1851 at least ten minutes prior to the start of the call. You will beasked to give your name and company details. You will then be placed on holdand will hear music until the conference call starts. A replay of this eventwill be available from 14:30 GMT until midnight GMT on Wednesday 1 March 2006.To listen, please dial +44 (0) 20 7806 1970, and enter pin number 8489732. Please note that only members of the investment community will have theopportunity to participate in the Q&A session. To listen to the audio webcast:Please visit www.j-sainsbury.co.uk and follow the on-screen instructions. Thearchive of this event will be available from 15:00 GMT on the day in the form ofa delayed webcast. To view the transcript of the conference call: Go to www.j-sainsbury.co.uk on Tuesday 28 February 2006 and follow the on-screeninstructions. Background Under the cash tender announced today Sainsbury's is offering to buy back anyand all of its £1.7 billion outstanding unsecured bonds, including £800 millionof maturing bond obligations in 2007/08. The bonds tendered will be funded bythe proceeds of two new CMBS securitisations which will be secured indirectlyagainst approximately half of the book value (7) of Sainsbury's supermarketportfolio. These properties have a current investment value of £3.55 billionand consist of 127 freehold and long leasehold supermarkets. The CMBS market provides the company with a cost effective, reliable andflexible funding platform with which to finance the business in the future. Asa result of the change from an unsecured to a secured debt structure,Sainsbury's on going interest costs are estimated to be reduced by up to £12million per annum (8). The properties securing the new debt will continue to becontrolled by Sainsbury's and remain on balance sheet. Operational flexibility,including the ability to develop store formats and location mix, will be largelypreserved. As a result of the proposed refinancing it is expected that Sainsbury's willincur a pre-tax one-off cost of £37 million in 2005/06. This includes cashcosts of approximately £17 million arising from the difference between theredemption value and the book value of the outstanding bonds, net of swaps andnon-cash cost of approximately £20 million relating to a tranche of a bond whichis economically hedged, but does not qualify for hedge accounting. Thetransaction costs will be amortised over the life of the CMBS and are includedin the net interest savings. Securitisation The CMBS will be secured indirectly against 127 freehold and long leaseholdsupermarkets which will be transferred to two new property subsidiaries ofSainsbury's. The expected new issue of up to £2.07 billion CMBS will compriseof two separate transactions: • £1.2 billion 12 year floating rate notes (including a euro denominatedtranche equivalent to approximately £400 million) issued by a newly incorporatedspecial purpose vehicle, Eddystone Finance plc, with a 7 year issuer call. Ifthe issuer does not refinance the transaction at the end of year 7, there willbe an increased coupon and accelerated amortisation. These notes will, via asecured loan structure, have the benefit of security granted over approximately75 freehold and long leasehold supermarkets with a market value of approximately£2.0 billion • £0.87 billion 25 year fixed rate notes issued by a newly incorporatedspecial purpose vehicle Longstone Finance plc. These notes will, via a securedloan structure, have the benefit of security granted over approximately 52freehold and leasehold supermarkets with a market value of approximately £1.55billion Each of the new CMBS transactions will include tranches of notes which areexpected to be rated AAA/Aaa, AA/Aa2 and A/A2 by S&P and Moody's respectively. The CMBS offer is expected to close on 24 March 2006. Morgan Stanley & Co International Ltd and UBS Limited are acting as jointbookrunners and joint lead managers for the new CMBS issue. Highbury Finance BV 2023 (Highbury) and Dragon Finance BV 2023 (Dragon) There are two existing securitisations, Highbury and Dragon, involving storesoccupied by Sainsbury's, in which the ratings of the securitised notes areexposed to the credit quality of Sainsbury's. Sainsbury's has agreed to seekchanges to the existing transactions that allow the ratings of the Highbury andDragon notes to be rated independently of the ratings of Sainsbury's, with anexpected rating of Baa3 (Moody's). Sainsbury's understands that the Highburyand Dragon issuers will be making separate announcements of their own. Cash tender process Sainsbury's is offering to buy back any and all of its £1.7 billion outstandingunsecured Bonds (6) currently rated BBB- by S&P and Baa3 by Moody's and througha tender process at a premium to current trading levels. Details are set out inthe tender offer and consent solicitation memorandum dated 24 February 2006.The tender offer is conditional upon the success of the CMBS. ISIN Amount Series of notes Repurchase Early repurchase spread (a) £(m) spread (a)XS0185282158 314.50 £314,500,000 5.25%. Notes due 2007 + 40 bp + 30 bpXS0132124735 487.00 €800,000,000 5.625%. Notes due 2008 +30 bp +20 bpXS0132125112 300.00 £300,000,000 6.50%. Notes due 2012 +95 bp +90 bpXS0145149703 250.00 £250,000,000 6.125%. Notes due 2017 +110 bp + 105 bpXS0145149539 350.00 £350,000,000 6.00%. Notes due 2032 +140 bp +135 bp Total 1,701.50 (a) Versus benchmark reference securities: UKT 4.5 per cent 2007, DBR 4.125 percent 2008, UKT 5 per cent 2012, UKT 4.75 per cent 2015 and UKT 4.25 per cent2032, respectively Sainsbury's intends to purchase bonds submitted into the tender offer prior tothe early submission date at the repurchase price plus an early submissionamount (together the early repurchase price). Any bonds submitted after theearly submission date and prior to the expiration of the tender offer will bepurchased at the repurchase price. The early repurchase price and therepurchase price will be determined by reference to the early repurchase spreadsand the repurchase spreads respectively (the early submission amount will be thedifference between the early repurchase price and the repurchase price). In conjunction with the tender offer, Sainsbury's is inviting bondholders toapprove proposals to amend the terms and conditions of the unsecured bonds toprovide for the early redemption of bonds not tendered into the offer. Theproposed modification will allow Sainsbury's to have the option to redeem bondsoutstanding at the completion of the tender offer. Any such redemption would beat the repurchase price; holders who submit valid voting instructions prior tothe early submission date would also be eligible to receive the early submissionamount payable only in the event of redemption. The offer to purchase is notcontingent upon receipt of necessary votes to pass the proposals. Provided theCMBS is successful Sainsbury's intends to repurchase any and all bonds whichaccept the tender offer, irrespective of obtaining approval for the proposedmodifications. The tender offer is expected to close simultaneously with the CMBS issue. Morgan Stanley & Co International Ltd and UBS Limited are acting as joint dealermanagers in relation to the tender offer and consent solicitation process. Properties included within the secured structure The properties to be included within the secured structure are broadly spreadacross England and Wales. Under the new Sainsbury's structure, Sainsbury'sSupermarkets Ltd (the operating company) will enter into newly drafted long-termleases for each of 127 participating supermarkets. Freehold Long lease Total Investment supermarkets supermarkets supermarkets value (£'bn)£1.2 billion floating rate notes 67 8 75 2.00£0.87 billion fixed rate notes 48 4 52 1.55Total 115 12 127 3.55 Expected Timetable Date Event 24 February 2006 Deal announced 24 February 2006 Tender offer to existing unsecured bondholders1 March - 9 March 2006 Investor roadshow and marketing20 March 2006 Pricing date24 March 2006 Closing date for tender and redemption (if applicable) of J Sainsbury plc £1.7 billion unsecured bonds24 March 2006 Closing date for £2.07 billion CMBS Notes (1) Morgan Stanley & Co International Limited (Morgan Stanley) and UBSLimited (UBS) are acting as financial advisers to J Sainsbury plc and no-oneelse for the purposes of the transaction. They will not be responsible toanyone other than J Sainsbury plc (whether or not a recipient of thisannouncement) for providing the protections offered to clients of Morgan Stanleyor UBS nor for providing advice in relation to the transaction. Any existingbondholder or prospective purchaser interested in buying the new securities isrecommended to seek its own financial advice. (2) This announcement is being distributed by J Sainsbury plc only to, andis directed only at, (a) persons who have professional experience in mattersrelating to investments who fall within Article 19(1) of the Financial Servicesand Markets Act 2000 (Financial Promotion) Order 2005 and (b) persons to whom itmay otherwise lawfully be communicated (together "relevant persons"). Anyinvestment or investment activity to which this announcement relates isavailable only to and will be engaged only with, relevant persons. Any personwho is not a relevant person should not act or rely on this announcement or anyof its contents. The information and any opinions contained in thisannouncement do not constitute a public offer under any applicable legislationor an offer to sell or solicitation or an offer to buy any securities orfinancial instruments. The information contained in this announcement is subjectto, and must be read in conjunction with, the information contained in the fulloffer documents to be issued in relation to the matters referred to in thisannouncement. (3) This announcement is not for publication or distribution, directly orindirectly, in or into the United States. This announcement is not an offer ofsecurities for sale into the United States. The securities referred to hereinmay not be offered or sold in the United States unless they are registered orexempt from registration pursuant to the US Securities Act of 1933. There willbe no public offer of these securities in the United States. (4) Certain statements made in this announcement are forward lookingstatements. Such statements are based on current expectations and are subjectto a number of risks and uncertainties that could cause actual results to differmaterially from any expected future results in forward looking statements. (5) The CMBS issuers will be Eddystone Finance plc and Longstone Finance plc,special purpose vehicles not part of the Sainsbury's group. (6) The credit ratings assigned to Sainsbury's by Standard & Poor's RatingService (S&P) and Moody's Rating Investor Service (Moody's) are currently BBB-and Baa 3 respectively, with negative outlook. (7) The secured property pool consists of 127 retail supermarket propertieslocated throughout England and Wales, comprising 12 long leasehold and 115freehold properties. Atisreal has carried out the property valuation as at 23February 2006. These supermarkets had a book value of £2.3 billion as at 26March 2005. (8) The interest savings have been calculated by comparing the current costof the £1.7 billion outstanding bonds, net of swaps, at rates consistent withthe company's current unsecured credit rating with the estimated costs on theproposed £1.7 billion securitisation, net of swaps. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Sainsbury's