Tesco Completes $824 Million Sale Leaseback of 15 Retail Stores and Two Distribution Centers in the UK

Bloomberg - September 15, 2009

Tesco Plc, the world’s third- biggest retailer, is planning to issue about 500 million pounds ($824 million) of bonds secured by rental payments from its own stores and distribution centers.

The U.K. supermarket chain’s notes due in October 2039 may yield about 2.25 percentage points more than U.K. government debt, said a banker with knowledge of the transaction. The bonds will be issued through Tesco Property Finance 2 Plc, a company set up to sell the notes, with the rent backing the securities guaranteed by Tesco, Fitch Ratings said in a report today.

The sale and leaseback transaction is Tesco’s second public issue of commercial property-backed securities this year, and the third for any company in Europe since 2007, according to data compiled by Bloomberg. The Cheshunt, England-based retailer issued 431 million pounds of notes secured by rents in June, while U.K. property firm Land Securities Group Plc sold 360 million pounds of lease-backed bonds in July.

“It represents an example of an effective and simple use of securitization to meet both investor and issuer needs,” said Stefano Loreti, a London-based portfolio manager at Cairn Capital Ltd., where he helps to oversee $40 billion of asset- backed securities. “More deals of this kind will keep coming to the market.”

Prices for bonds backed by consumer debt, corporate loans and real estate have plunged as the credit crisis caused investors to shun hard-to-value assets. The yield over benchmark rates investors demand to buy top-rated commercial mortgage- backed notes in euros is about 7.73 percentage points, more than double the rate a year ago, Deutsche Bank AG data show.

Leaseback Transaction

Tesco’s transaction involves the sale of 15 retail stores and two distribution centers with a total value of about 500 million pounds, according to Tesco spokesman Tom Hoskin.

“Similar to our most recent sale and leaseback deal in June, this will be primarily funded by the issue of a fixed-rate note,” Hoskin said.

Fitch estimates Tesco may issue about 559 million pounds new notes, which it ranks at A-, the seventh-highest investment- grade rating. Standard & Poor’s also ranked the debt at A-.

Goldman Sachs Group Inc. is managing the sale of Tesco’s bonds. Sphere: Related Content