Asda's Financial Stability Under Scrutiny
Asda, the UK's third-largest supermarket chain, faces a significant financial challenge with a looming £900 million repayment to its former owner, Walmart, by 2028. This repayment, including £500 million for Walmart's remaining stake and £400 million in interest, has raised concerns about Asda's financial stability.
Credit rating agency Fitch has warned of a potential overhaul of Asda's capital structure due to the repayment. This comes amidst a turbulent period for Asda since its 2021 acquisition by private equity owners TDR Capital and the Issa brothers in a £6.8 billion debt-driven deal. Asda's market share has dipped from 14.8% to 12.5%, and cost-cutting measures have drawn criticism for impacting operations and customer experience.
Fitch has downgraded Asda's earnings forecast by £185 million, adding to the pressure. The agency noted that refinancing the supermarket's £3.2 billion debt earlier this year provided temporary relief but resulted in higher interest costs. It suggests a full restructuring of Asda's finances might be needed by 2027 to accommodate the Walmart repayment.
New chairman Allan Leighton has pledged to tackle Asda's sales slump and improve its price competitiveness and stock availability over the next three to four years. However, industry observers question whether the private equity owners will commit the significant investment required, potentially exceeding £1 billion.
In August, TDR Capital and co-owner Mohsin Issa injected £30 million into Asda to address immediate financial concerns. Despite these measures, Fitch remains uncertain about Asda's ability to repay its debts without major refinancing.
An Asda spokesperson defended the business's financial health, highlighting its robust cash generation and a reduction in leverage from 4.1x to 3.0x over the past 18 months. They emphasized Asda's strong capital structure and a £100 million decrease in net debt in the past quarter.
While Leighton's strategy and Asda's refinancing efforts offer a potential path to recovery, the looming Walmart repayment continues to cast a shadow over the grocer's financial stability. The coming years will be crucial for Asda to navigate these challenges and secure its long-term future.