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Real estate: Sainsbury CMBS offers food for thought to other troubled credits

More opco/propco deals are likely given rising real estate values and investor interest in secured debt.

As the corporate credit rating of UK supermarket group J Sainsbury teeters on the edge of a drop below investment grade, the secured refinancing of half of its property portfolio could prove to be a successful defensive move against further downgrades.

Other companies in similar rating difficulties but with large portfolios of unpledged assets and a need to placate their shareholders will be watching Sainsbury’s activities with great interest. The company announced plans at the end of February to redeem all of its £1.7 billion ($3 billion) unsecured debt via a £2 billion commercial mortgage-backed securitization, with the net proceeds of the issue being injected into its pension fund. The bonds will be issued via two transactions, one fixed rate and one floating rate. The £1.2 billion 12-year FRN Eddystone Finance structure is backed by 75 supermarkets and the £868 billion 25-year fixed-rate Longstone Finance deal by 52 supermarkets – in total these comprise half of the company’s property portfolio.

Sainsbury’s five-yr CDS spreads
Source: Morgan Stanley

News of the restructuring drew immediate parallels with Land Securities’ 2004 debt refinancing.

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