Derivative traders on Friday braced for a major decline in credit quality of Albertsons Inc, as the No 2 US grocery-store chain appeared closer to being sold. The auction for the Boise, Idaho-based company appeared nearing an end in a possible deal worth about $9.6 billion.
A bidding team including buyout firm Cerberus Capital, Kimco Realty Corp and grocer Supervalu Inc has had the highest offer on the table since late last week, sources familiar with the situation said.
The shares ended up 1.4 percent at $24.33. Five-year default protection on Albertsons debt widened by about 30 basis points to 325 basis points per year, which is near recent wides, traders said.
Albertsons' board is scheduled to meet this weekend to review the offers, with an announcement expected next week, the sources said. The structure of the bid remains unclear since other bidders are vying for Albertsons' drug store chains, among other possible alternatives, sources familiar with the situation said.
Albertsons is currently a low to mid triple-B credit. The grocery-store chain could easily fall to low single-B when taken private and the new owners pay for the purchase by heaping more debt on the company's balance sheet, analysts said.
Credit analysts on Friday were mixed as to whether Albertsons' wider spreads make it a potentially attractive speculative bet.
One analyst, who asked not to be named, said there were too many unknowns to recommend either going long or short this credit.
Investors don't know how far Albertsons' credit ratings will fall or how the company might be broken up, the analyst said.
Andrew Brady, analyst at CreditSights, maintained his "market-weight" recommendation on Albertsons. He shifted from "under-weight" after the company put itself up for sale and its spreads dramatically widened.
Five-year spreads could widen to 450 basis points on an unfavourable private equity deal but they also could tighten or not move much if the ultimate deal does not hurt credit as much, Brady said.
B. Craig Hutson, analyst at Gimme Credit, maintained his "sell" recommendation on Albertsons, which is based on the expectation that a private equity group will buy the company.
Albertsons officials were not immediately available for comment.