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I Guarantee You… No More

16 January 2017 by lberuti

The CDS of MRWLN (Safeway Ltd) references the 2018 bonds issued by Safeway Ltd. Because of cross-guarantee provisions, it also covers the debt of Wm Morrison Supermarkets Plc which is a substantially riskier entity. But as soon as Safeway’s 2018 bonds are gone, the cross-guarantee goes as well. This morning, Morrison announced a cash tender for up to £180Mln across 3 bonds, including the Safeway 2018 – which has £200Mln outstanding – with a preference for the latter. Potentially, this offer only leaves a marginal amount of the only remaining Safeway Ltd bond. It creates a genuine orphaning risk for CDS referencing Safeway Ltd as the cross guarantee will most likely fall shortly after. While MRWLN’s 5-year CDS was a couple of bps wider at the open with all UK retailers on the back on the renewed weakness of the pound, it dropped almost 30bps when news of the tender hit the wire and closed at 68bps, which is 22bps tighter on the day. Meanwhile, the broader credit market was a bit weaker across the board on concern Mrs May could be prepared to lead the UK to a hard Brexit and following comments by US president elect suggesting other countries could break from the bloc. Nevertheless, it all happened in limited volumes in the absence of US investors.