Albertson's 2026 Bonds Yield 9.6% To Maturity

by: Jeremy LaKosh
Summary

Albertson's has taken on significant leverage due to acquisitions.

The privately held grocer has reduced its long term debt by $1 billion in the last three quarters.

The company's cash flow management and debt maturity schedule can help fixed income investors determine the risk of their investment.

Albertson’s, a large privately held grocery company, has seen its company become heavily leveraged as a result of several acquisitions. The company’s debt rating has sunk to high yield, creating a high risk, high reward opportunity. One bond, maturing in 2026, currently trades around 90 cents on the dollar. With a 7.75% coupon, the bond yields over 9.6% to maturity. Albertson’s cash generation in 2018 demonstrated its ability to reduce debt and may provide fixed income investors with a good return.

Source: FINRA

Albertson’s 2026 bond yields higher than most of its bond offerings and is currently projected to return higher than the benchmark of B rated bonds. The pricing also exceeds a recently announced 7.5% bond offering set to mature in 2027. While a handful of longer-term bonds yield higher, each of them has outstanding offering of under $100 million and therefore are sparsely traded.

Source: FINRA

Albertson’s income statement has seen modest improvements compared to a year ago. The company’s revenues year to date have increased by $600 million. The revenue increase combined with a $200 million decrease in selling and administrative expenses has led the company to swing to an operating profit of $500 million, which is more than $700 million better than the same period a year ago.

Source: SEC 10-Q

Albertson’s balance sheet highlights further improvements in 2018. The company reduced its long-term debt by more than $1 billion. Albertson currently owes its debt holders over $10.5 billion against more than $16 billion of tangible assets (current assets plus net property and equipment). The company’s equity remained stable compared to the end of 2017.

Source: SEC 10-Q

Albertson’s debt reduction came from three sources during the first three quarters of 2018. First, the company generated over $1 billion in operating cash flow, a $350 million increase from the year before. Most of the operating cash flow was expended on capital expenditures, but $150 million remained as free cash flow to be applied towards debt reduction. The company also sold assets for over $500 million, and reduced its cash balance by $200 million, all of which it applied towards debt reduction.

Source: SEC 10-Q

The company’s debt profile saw additional changes in 2018. Albertson’s drew from its ABL facility to pay down its higher interest-bearing term loans. The company also paid down its Safeway debt and other notes payable. The cumulative financing activities should reduce the company’s interest expense by at least $60 million in 2019.

Source: SEC 10-Q

While the company does not provide guidance for operating or free cash flow, the company suggested $1.4 billion in annual capital expenditures and $138 million in capital leasing obligations from the company’s third quarter earnings release. The ongoing capital expenditure forecast is pessimistic considering $200 million was dedicated to store remodels centered around the Safeway acquisition. While changes in working capital can impact operating cash flow, I estimate that Albertson’s should be able to generate $160 million of free cash flow annually, net of leasing obligations.

With no significant debt obligations, Albertson’s should not need new financing until 2022, when one of its two term loans come due. The company does not have any significant note balances coming due until 2024. As long as Albertson controls its cost pressures and continues to grow its margins, fixed income investors should enjoy a great return.

CUSIP: 013104AC8

Price: $89.98

Coupon: 7.75%

Yield to Maturity: 9.678%

Maturity Date: 6/15/2026

Bond Type: Senior Unsecured Debenture

Credit Rating (S&P): CCC+

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I own Albertson bonds maturing in 2024.