Amazon Puts Bond Traders On Edge In Once-Quiet Corner of Market
The bond market has long viewed America’s supermarkets as a species apart from their deeply troubled peers in the retail sector.
As conventional wisdom had it, grocers could resist the onslaught of e-commerce that was decimating industries such as clothing and electronics. After all, shoppers want to touch their avocados and see their T-bones.
But now, just days after Amazon officially entered the grocery business, that confidence is shaken.
The bonds that financed Apollo Global Management’s purchase last year of upscale grocer Fresh Market plunged to new lows this week. The cost of buying contracts to protect against a default in Albertsons Cos.’s debt has jumped. Bonds of Bi-Lo Holdings have lost almost half their value this year.
It’s no secret why. Amazon, with its low prices and online convenience, has revolutionized retail and driven traditional rivals into bankruptcy. This week, the company completed its purchase of Whole Foods Market for $13.7 billion, raising the prospect that it will have the same impact on a grocery industry that was already starting to struggle.
A price war has weighed on supermarket results, and the threat of e-commerce is raising concerns that the weakest won’t survive.
“It’s the fear factor of Amazon,” said Mickey Chadha, an analyst at Moody’s Investors Service. “No retailer can under-price as long as Amazon can, make no money and get away with it. That’s why people are scared.”
When Apollo Global bought Greensboro, North Carolina-based Fresh Market for $1.4 billion last year, the grocery world seemed quite different. The chain, known for its fresh produce, had seen sales slow. To lure customers back to Fresh Market’s roughly 170 stores, the private-equity titan was betting it could rely on its experience with previous - and profitable - investments in companies such as organic grocer Sprouts Farmers Markets.
But Fresh Market is struggling for some of the same reasons that sent Whole Foods into the arms of Amazon. Mainstream competitors including Kroger and Walmart have pushed deeper into sales of fresh produce and organic products. Supermarkets have opened so many stores that many analysts expect a shakeout. Before the Amazon deal, Fresh Market bonds traded as high as 91 cents on the dollar. Now they fetch less than 76 cents.
Stock investors have already punished grocers. The day Amazon announced the Whole Foods deal, Kroger lost more than $2 billion in market value, and its shares have fallen more than 35% this year.
Kroger’s bonds, which are investment grade, haven’t been hit. But about $3 billion of Albertsons debt coming due in 2021 has felt a chill. The loans have been trading at 97.6 cents on the dollar. Large, liquid, secured loans of that size typically command par, or 100 cents. A public stock offering for the Cerberus Capital Management-backed grocer was again put on hold after Amazon announced its purchase of Whole Foods.
Neither Kroger’s nor Albertsons is trading at distressed levels. Investors seem to be betting that the biggest companies have the heft to survive a price war, at least for now, while smaller or less financially strong players may not.
No Clear Differentiation
In this environment, mid-market stores with no clear differentiation on price or food quality will struggle, according to Roger Davidson, a former grocery executive who runs an industry consulting business.
“They’re at risk in this new world, there’s no doubt about it,” he said.
For example, Bi-Lo Holdings has borrowed hundreds of millions to make cash payouts to private-equity owner Lone Star Global Acquisitions. One of the bonds the company sold to pay the dividends now trades at levels indicating investors expect to recoup only a third of what they loaned the company.
Tops Friendly Markets, which is reporting millions in losses, is straining under $720 million in debt. Using a maneuver typical of distressed companies, it put off repayments due in 2018 while it grapples with price deflation and traditional rivals in its western New York home turf. If earnings and the balance sheet don’t improve, investors holding the rest of Tops’ bonds could find they’re stuck with spoiled goods.
“There are some grocery stores that are highly leveraged that don’t have the scale to withstand a prolonged pricing war,” Chadha said.