Morrisons - comment

Morrisons is in discussions with Realty for a £600m-£1bn sale-and-leaseback of store properties to fund competitive reinvestment against the discounters, not to pay down debt. We have previously discussed that such a transaction would increase the risk profile for creditors: mortgaged freehold stores leave the collateral pool, replaced by long-dated lease obligations, at a moment when guarantor coverage sits only 3 points above the 80% covenant floor. The second Permitted Distribution Transaction basket also requires pro forma CSSLR at or below 3.00x, tight against current leverage of approximately 2.9x. We hold a small long position in the illiquid SUNs and are watching deal structure and pro forma leverage closely before drawing further conclusions.