Asda faces financial strain amid £900m debt challenge

This hefty sum includes £500m for Walmart’s remaining stake and £400m in accrued interest.

• Pramod Thomas
• 03 December, 2024

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By: Pramod Thomas

ASDA’s financial stability is under scrutiny as the supermarket prepares to manage a £900 million payment to its former owner, Walmart, by 2028.

This hefty sum includes £500m for Walmart’s remaining stake and £400m in accrued interest, raising concerns about how the retailer will navigate its growing debt obligations, the Times reported.

Credit rating agency Fitch has indicated that the payment may require a major restructuring of Asda’s finances. The supermarket, currently the UK’s third-largest, has faced significant difficulties since being acquired by TDR Capital and the Issa brothers in a leveraged £6.8 billion deal in 2021. Over this period, its market share has fallen from 14.8 per cent to 12.5 per cent.

Cost-cutting measures introduced under the private equity ownership have drawn criticism, with union representatives accusing management of neglecting store operations. Former chairman Lord Rose of Monewden recently voiced disappointment, admitting he felt “embarrassed” about the chain’s recent performance.

Allan Leighton, who succeeded Lord Rose as chairman last month, has pledged to revive Asda’s fortunes over the next three to four years. His strategy focuses on making prices more competitive and ensuring better stock availability.

However, questions remain about whether its owners will inject the necessary funds, which experts estimate could exceed £1bn over the next two years, to facilitate this turnaround.

Fitch recently revised Asda’s earnings projections downward by £185m, adding to the pressure. Although the retailer refinanced £3.2bn of its debt earlier this year, deferring significant repayments, the move has led to increased interest costs.

The rating agency has warned that the large payment to Walmart in 2028 could trigger a full overhaul of Asda’s financial structure as early as 2027.

In August, TDR Capital and co-owner Mohsin Issa contributed an emergency £30m to help stabilise the business. Despite this, the scale of the challenge remains significant. Analysts and industry insiders have raised concerns about whether these efforts will be enough to secure Asda’s long-term stability.

“While we recognise Fitch’s perspective, it represents their opinion and not an established fact. Asda maintains a disciplined and proactive approach to managing its financial commitments,” said an Asda spokesperson while addressing Fitch’s warnings.

The spokesperson further highlighted the refinancing earlier this year, describing it as evidence of strong investor confidence and a move that pushed key repayment deadlines well into the future. They also noted that Asda’s financial structure allows the company to generate strong cash flow, support investments in employees and customer initiatives, and reduce leverage.

At the end of the third quarter, Asda reported a net debt of £3.8bn, reflecting a £100m reduction compared to the previous quarter. The supermarket reiterated its commitment to lowering its debt and sustaining financial health.