Banks Sell Tesco-Tied Notes as U.K. Grocery Competition Picks Up

Banks sold notes linked to the debt of U.K. grocers for the first time in almost eight months as stiffer competition in the supermarket sector made their bonds riskier, leading banks to pay higher coupons.

Nordea Bank AB issued $2 million of notes tied to a basket of eight bonds, including Tesco Plc’s, on Dec. 1, in the first sale of U.K. supermarket-related securities since April, according to data compiled by Bloomberg. Banks have sold $17.2 million of notes tied to U.K. grocers this month, including $15.6 million connected to Tesco, the data show.

Tesco, J Sainsbury Plc and Wm Morrison Supermarkets Plc are among U.K. grocery retailers that have lost market share this year as discounters forced them to cut prices and run promotions. Cheshunt, England-based Tesco’s difficulties were exacerbated when it divulged accounting irregularities in September, leading to the suspension of eight senior managers.

“One reason we look at names beyond the Nordic region like Tesco is that private banking and high net-worth clients are looking for the yield pick-up,” said Tuomo Lehtovaara, senior director in investment products at Nordea in Helsinki. “Another reason is that they give diversification for Nordic customers.”

The cost to buy protection on Tesco’s bonds has more than doubled this year, soaring 110.7 basis points to 184 basis points on Dec. 19, Bloomberg data show. Standard & Poor’s placed the U.K.’s biggest grocer on negative CreditWatch Dec. 10, saying intensifying competition will weaken profitability. The retailer is rated BBB- by S&P, one level above junk.

Sainsbury Notes

Nordea issued notes tied to Tesco’s bonds on Dec. 18 that pay 1.5 percentage points more than the three-month euro interbank offered rate. Notes issued in April by Credit Suisse Group AG pay 1.07 percentage points more than the three-month dollar London interbank offered rate.

HSBC Holdings Plc sold $1.6 million of notes tied to the debt of Sainsbury on Dec. 10, the first offering linked to the U.K.’s third largest supermarket chain since March. Sainsbury’s credit-default swap spread has widened since the beginning of the year, rising 75.5 basis points to 164.9 basis points on Dec. 19. The retailer last month forecast falling second-half profitability.

Shani Halstead, a spokeswoman for HSBC in London, didn’t respond to a request for comment.

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