Safeway Sells 10-Year Notes at Lower Yield Than Larger Competitor Kroger
Safeway Inc., the fourth-largest U.S. supermarket chain by revenue, sold $500 million of 10-year notes at a lower yield than larger rival Kroger Co.’s existing debt due 2020.
Safeway’s notes pay 95 basis points more than similar- maturity Treasuries, according to data compiled by Bloomberg. A basis point is 0.01 percentage point.
Kroger’s notes due 2020, the closest maturity to the new Safeway issue, traded July 26 at 115.771 cents on the dollar to yield 4.12 percent, a 109.8 basis-point spread, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
“Safeway bonds have rallied strongly and now trade at or through comparable Kroger bonds,” Craig Hutson, senior bond analyst at Gimme Credit LLC, an independent corporate bond research firm, wrote in an e-mailed note. Hutson said in the note that he wouldn’t buy the new issue given the differential to Kroger’s bonds and the Cincinnati-based retailer’s “much better operational track record.”
“Safeway should be more like 10 basis points in back of Kroger for a comparable 10-year issue,” Hutson said in a telephone interview.
Safeway, based in Pleasanton, California, said July 22 that second-quarter net income fell to $141.3 million, or 37 cents a share, from $238.6 million, or 57 cents, a year earlier, when it had a tax benefit, according to a company statement. Results matched the average estimate of 13 analysts surveyed by Bloomberg.
Forecast Cut
The grocer lowered its annual profit forecast on price- deflation expectations, Chief Executive Officer Steve Burd said in the statement.
Proceeds from the debt sale will be used to repay $500 million of 4.95 percent notes that mature Aug. 16, according to the prospectus, which didn’t specify the size or timing of the sale. Christiane Pelz, a Safeway spokeswoman, didn’t immediately respond to a request for comment.
Safeway last tapped the credit market a year ago, when it sold $500 million of notes due August 2019, according to data compiled by Bloomberg. That debt yielded 5.12 percent, or 158 basis points more than similar-maturity Treasuries, the data show.
The 2019 notes, the closest maturity to the new issue, traded July 23 at 108.785 cents on the dollar to yield 3.84 percent, an 89.8 basis-point spread, according to Trace data.
Debt Reduction
Kroger, the second-largest supermarket chain by revenue, sold $300 million of 30-year notes on July 6, according to data compiled by Bloomberg. The debt yielded 155 basis points more than Treasuries, the data show.
Meghan Glynn, a Kroger spokeswoman, didn’t immediately respond to a request for comment.
Fitch Ratings, in a report today, assigned Safeway’s proposed offering a BBB rating. Monica Aggarwal, an analyst at Fitch who contributed to the report, said in an interview today that Fitch expects Safeway to continue “directing cash flow towards debt reduction over time” to maintain its credit metrics.
Wal-Mart Stores Inc. is the largest supermarket chain by revenue and Costco Wholesale Corp. is the third-biggest.
To contact the reporter on this story: Katie Evans in New York at kevans28@bloomberg.net
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