Morrisons’ takeover will ‘materially weaken’ sponsor covenant

In a statement on Tuesday, the trustees of the Morrisons Retirement Saver Plan and the Safeway Pension Scheme stated that accepting any offer would have a negative impact on the sponsors’ covenant if no “agreement is reached to provide additional protection for the schemes”.

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, Clayton, Dubilier & Rice and Fortress Investment Group. After CD&R offered a higher cash price on August 19, the board of directors at Morrissons have 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 read.

As reported by Pensions Expert, discussions had been ongoing between the trustees and Fortress since their offer announcement on July 3, but they have not had the same opportunity with CD&R.

The trustees stated that a “helpful Introductory meeting” took place prior to the new offer made on August 19, with the professionals looking forward “to productive discussions leading to agreeing an appropriate mitigation package with CD&R as soon as possible,” and with Fortress should it continue to pursue an offer for Morrisons, they added.

Steve Southern, chair of trustees for the Morrisons Retirement Saver Plan and the Safeway Pension Scheme, said: “An offer for Morrisons structured along the lines of the current offers would, if successful, materially weaken the existing sponsor covenant supporting the pension schemes, unless appropriate additional support for the schemes is provided.

“We hope agreement can be reached as soon as possible on an additional security package that provides protection for members' benefits.”

In response to the trustee statement, the retailer said it “places significant emphasis on the wider responsibilities of ownership of the Morrisons business and recognises that the Morrisons Retirement Saver Plan and the Safeway Pension Scheme are a major part of that”.

It added: “Morrisons has a long-established pension strategy, which has been agreed with the trustees, a key aim of which is to ensure that the security of members' benefits in the pension schemes is appropriately protected.

“Morrisons is supportive of the parties reaching an agreement which protects and supports the pension schemes in an appropriate manner, and will continue to work with all parties to achieve this as soon as possible.”