Morrisons staff british fruit and veg warehouse

Source: Morrisons

Morrisons’ in-house manufacturing sites gave the supermarket an advantage over rival Asda, according to ratings agency

Plans to refinance Morrisons multibillion-pound debt pile have been dealt a blow as Moody’s downgraded the supermarket’s credit rating.

The ratings agency assigned the holding company formed by Clayton, Dubilier & Rice (CD&R) to acquire the Bradford-headquartered supermarket chain a B1 rating, which is classed as ‘junk’ grade and signals an higher than average chance a company will default on its obligations.

It represents a downgrade for Morrisons from a Ba1 rating following the £10bn takeover by the US PE firm last year.

Fellow ratings agency Fitch also assigned the group with a speculative debt rating of BB.

Fitch said its view on Morrisons balanced an experienced management team, led by David Potts, a vertically integrated manufacturing business, well-invested stores and strong cashflow generation capabilities with financial leverage that was “incompatible” with an investment grade rating.

CD&R fought off competition from Fortress Investment Group to seal a £7bn (£10bn including Morrisons’ debt) deal in October.

The PE firm now needs to raise £7bn in debt to finance the acquisition, which is almost 8x Morrisons’ EBITDA in the year ended 1 February and more than twice the debt levels carried by the retailer in recent years.

Moody’s said its stable outlook for Morrisons relied on expectations the group would gradually reduce its leverage over the next 18 months.

“In addition, the stable outlook also assumes adequate liquidity and no meaningful sale and lease back transactions that could negatively impact on leverage,” Moody’s added.

CD&R made a number of commitments - which are not legally binding - around the sale of Morrisons assets, including safeguarding the freehold store estate, Bradford headquarters and staff rates of pay.

However, Sky News reported earlier this month that the new owner is looking to appoint advisors to help sell a £500m property portfolio, including a large chunk of the supermarket’s manufacturing and distribution facilities.

Fitch highlighted the benefits to Morrisons of its vertically integrated model, which sees about half of its fresh food manufactured or packed across 19 owned sites. The ratings agency added the model supported profitability and gave the supermarket an advantage over rival Asda.

The ratings by Moody’s and Fitch could make life more difficult for CD&R as it gets ready to secure a major debt financing package with banks and bond investors, with a lower credit score hiking up the cost of borrowing.

It follows Morrisons, earlier this month, warning over the impact of the war in Ukraine and soaring inflation squeezing sales and profits this year.

Morrisons is also losing market share in a tightening grocery market, with Aldi closing the gap between its Big Four rival to just 0.5 percentage points in market share terms.