Aussie Grocery Giant in Leadership Limbo Fuels Bond Market Angst

  • Woolworths has cut earnings forecast, is yet to name new CEO
  • Cost of insuring the retailer's debt has doubled in a year

Bond investors are souring on Woolworths Ltd. as sales slump at Australia’s largest supermarket chain and the company still hasn’t named a new boss.

The cost of insuring the Sydney-based retailer’s debt against non-payment this week climbed to a four-year high of 127.5 basis points, while the premium over the benchmark iTraxx Australia credit-default swap index reached the most since at least 2007. Its bonds are the worst-performing local company debt this year in Bank of America Merrill Lynch’s Australia Corporate Index.

No replacement has been named since Chief Executive Officer Grant O’Brien announced in June his plan to retire. The lack of a successor comes as Woolworths faces stronger competition and anemic consumer demand. Moody’s Investors Service and Standard & Poor’s both shifted their debt rating outlooks to negative after the grocer last month cut its profit forecast and revealed a second straight quarterly drop in same-store sales.

“They seem to be in limbo at the moment and will remain that way probably until somebody’s appointed,” said Michael Bush, Melbourne-based head of credit research at National Australia Bank Ltd. “The bonds have obviously underperformed.”

Price War

Woolworths’ longstanding duel with Wesfarmers Ltd.-owned supermarket rival Coles has been complicated in recent years by the emergence of German-owned discounter Aldi as a competitor, and the resulting price war has hurt Woolworths’ takings. Its Masters home-improvement outlets have struggled to compete with Wesfarmers’ Bunnings brand, while the firm’s Big W stores are suffering from weakness in the department store sector. Both S&P and Moody’s have already cut Woolies’ ratings once this year.

The retailer’s mission to find a new CEO is part of a wider shift in top leadership positions that has seen head of supermarkets Tjeerd Jegen leave in February and the replacement of chairman Ralph Waters by Gordon Cairns, who formerly led the board at David Jones Ltd. Woolworths spokeswoman Claire Kimball declined to comment on debt market movements or when a new CEO would be announced.

The following charts show the response of debt investors to the situation, how Woolworths bonds have performed versus peers and declining expectations for earnings.

Chart 1: Woolworths credit-default swaps more than doubled over the past year, exceeding the iTraxx Australia index. The contracts were at 125 basis points on Tuesday.

Chart 2: Woolworths Australian dollar bonds returned less than 1 percent this year and also suffered the biggest price loss among local borrowers.

Chart 3: Analysts have slashed revenue and profit forecasts. The consensus view for earnings before interest, tax, depreciation and amortization in 2016 has now slipped below A$4 billion, according to estimates compiled by Bloomberg. 

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