On the go: Clayton, Dubilier & Rice, one of the two private equity managers bidding for Morrissons, is open to considering additional securities to the retailers’ defined benefit schemes as part of their dialogue with trustees.
In a market update on Wednesday, CD&R stated that since its initial proposal on June 14, the manager “has consistently acknowledged and appreciated that the schemes and the trustees are important stakeholders in Morrisons”.
After an initial meeting with the scheme trustees on August 17, “the dialogue is now progressing”.
CD&R noted that its intention is to “continue this dialogue to ensure that the trustees understand and support the sponsor covenant” following the completion of its offer.
It added: “CD&R understands and accepts that the trustees consider this dialogue is likely to extend to considering arrangements which provide additional security to the schemes through an appropriate mitigation package.”
The private equity manager statement follows comments from the trustees of the Morrisons Retirement Saver Plan and the Safeway Pension Scheme, which on Tuesday warned that both takeover offers for the British retailer will “materially weaken” the sponsors’ covenant.
This was due to several factors, such as “the introduction of additional debt secured with a priority claim ahead of the schemes on the majority of the Morrisons group assets, the related increased debt service burden and potential future corporate activity, including the potential for refinancing and restructuring”.
The British retailer has been the target of a bidding war between two private equity managers, CD&R and Fortress Investment Group. After the former offered a higher cash price on August 19, the board of directors at Morrisons stated their intention to recommend this offer and withdraw their support to the Fortress offer.
The trustees noted that while the schemes are currently in surplus on an ongoing funding basis and also benefit from security from freehold properties held within a pension funding partnership structure, they cannot afford buyout at this moment.
Morrisons sponsors two DB schemes: the Morrisons Retirement Saver Plan with two sections — the 1967 Section and the RPS section, which is a cash balance scheme — and the Safeway Pension Scheme.
The schemes have an estimated aggregate Section 75 deficit of around £800m at May 31 2021.
The schemes' long-term objective is to reach full funding on a buy-out basis in less than 10 years, which the trustees have maintained “is possible without requiring cash contributions from the Morrisons group beyond those already agreed”.
However, the trustees noted that the schemes are dependent on sponsor covenant, and should those companies become insolvent the pension funds would have unsecured creditor claims.
Due to this, the trustees are focused "on agreeing additional security to provide covenant support for the schemes on their journey to buy-out,” the statement on Tuesday read.
In Wednesday's statement, CD&R reiterated that existing pension rights of all Morrisons' management team and employees will be fully safeguarded, and that its intention is for employer contributions to the scheme to continue in line with current arrangements.
