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Asda’s owners created nearly £1.5bn of new liabilities that are not counted in the supermarket chain’s headline debt figures to finance a buyout of a petrol stations business that they also control.
Asda last year announced a £2bn takeover of the UK and Irish operations of EG Group. Both businesses are owned by private equity firm TDR Capital and the billionaire Issa brothers.
While Asda described the EG deal as “leverage neutral” — meaning it would not increase its debt-to-earnings ratio — documents accompanying a new bond sale show this was achieved by creating other forms of liabilities that do not count towards its £4.84bn debt load.
This included raising £646mn from selling off properties and leasing them back, £400mn from borrowing against ground rents and a further £401mn from a shareholder loan that recycled proceeds from a previous property transaction.
These deals all happened last year and were in addition to a £684mn loan from private capital firm Apollo, which did count towards Asda’s debt figures.
The transactions are the latest examples of the financial engineering that TDR and the Issa brothers have used to build their retail and petrol pump business, having bought Asda in 2021.
The owners have previously drawn scrutiny from parliament for financing methods such as using intercompany loans to minimise equity contributions and borrowing from EG Group to buy private jets.
The transactions also pushed up Asda’s annual interest costs, from £317mn in 2021 to £429mn in 2023. Analysts at research firm CreditSights have predicted the group’s annual burden of debt and lease payments could rise to £530mn, saying its financial reporting “obscures the growing burden” of leases.
In its final year under previous owner Walmart, Asda had no external interest payments and only £67mn of annual lease payments, bond documents show. Walmart did however take large dividends out of the business over the course of its some 20 years of ownership.
Asda told the Financial Times that the “structure of the [EG] deal was clearly communicated to all financial stakeholders at the time”, that its financial reporting was “very consistent” and followed an accounting convention of subtracting lease and ground rent payments from its earning figures.
While Asda did sale-leaseback deals on its warehouses to help fund its 2021 buyout, last year’s £400mn ground rent financing, with Australia’s Macquarie, is the first time it has borrowed against the freeholds of its supermarkets.
The prospectus for the new bond sale also confirms that £401mn of equity contributed by TDR and the Issa brothers towards the EG deal was in fact a loan they extended to Asda using proceeds from an earlier sale and leaseback.
Lenders and rating agencies consider it as equity because it would rank behind other debt in an insolvency.
Asda said it “clearly told investors that the ground rent would be treated as a lease adjusted from debt”, while confirming that the equity came from “cash proceeds” of “sale and leaseback of warehouse assets in 2021”.
The group has also made increasing use of supply-chain finance, a technique that has attracted scrutiny for creating debtlike obligations that are not classed as borrowing. Its outstanding supply-chain finance liabilities have risen from £324mn in 2021 to £426mn in 2023.
Asda said that its disclosure on supply chain finance “is very comprehensive and transparent”, adding that this type of financing was also used under its previous owner Walmart.
On Thursday, the company borrowed £2.85bn to refinance debt raised in its 2021 buyout, in a deal that will reduce its overall debt load by £340mn, resulting in credit rating upgrades from Moody’s and Fitch.
The debt deal comes after speculation about a rift between Mohsin and Zuber Issa, which Mohsin has denied, and media scrutiny of their private lives.
The bond prospectus notes that there are “active discussions regarding Zuber Issa ceasing to continue as a shareholder” of Asda and that the two brothers and TDR previously agreed to “first offer any shares to the other shareholder before offering them for sale to a third party”.