Ocado’s Total Bond Bill Set to Be Triple What It Paid Last Year

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(Bloomberg) — After Ocado Group Plc finalizes the sale of its latest bond, the company’s total annual interest bill may be close to £100 million ($134 million) — more than triple what it was paying this time last year.

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The online grocery firm is looking to sell £300 million of senior unsecured notes due 2030 and is marketing the deal with a yield of 10.75%-11%, according to a person familiar with the matter, who asked not to be identified because the information is private. The proceeds — along with cash on the balance sheet — will be used to buy back notes maturing in 2025 and 2026 which have coupons of 0.875% and 3.875%, respectively.

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The bond sale comes after Ocado reported a worse-than-expected pretax loss for 2024, adding pressure on the company to show the viability of its capital-intensive robot technology. The leader of that unit — which counts Kroger Co. and Canada’s Sobeys among partners — recently stepped down. Group chief executive officer Tim Steiner has said Ocado will cut jobs to reduce costs.

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The significant step-up in the rate on the new bond — together with chunky coupons on two debt instruments issued last summer — mean that Ocado’s annual interest bill could be as high as £98.5 million compared with £27.25 million this time last year, according to Bloomberg calculations. The jump in costs shows how persistently-high interest rates are affecting British businesses — especially those with a junk rating.

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A spokesman for Ocado declined to comment on the bond sale.

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The latest refinancing, along with similar deals last year, would extend Ocado’s maturity profile by several years. At the initial marketing levels, the new bond would come with an annual interest bill of £32.25 million-£33 million compared with around £10 million on the bonds being refinanced. That adds to hefty interest payments on £450 million of notes issued in August with a coupon of 10.5% and on a separate convertible bond sold at around the same time.

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Sea Change

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The rates mark a sea change from five years ago, when Ocado’s delivery business made it a pandemic-era market darling. At that time, low interest rates and investor clamor for e-commerce exposure allowed the company to issue convertible bonds — debt that can be swapped for shares at a pre-agreed price — with coupons below 1%. 

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While the interest bill is set to jump, Ocado will save some money on its refinancing exercise, because it is offering to buy back the outstanding bonds at a discount to par. The company also got a boost earlier this year when JPMorgan Chase & Co. recommended buying its shares for the first time in seven years on expectations of more orders for its technology.

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Fitch Ratings gave the new bonds a rating of B-, just a notch above the highly-risky Triple C bracket. The ratings firm cited high execution risk that Ocado reaches scale and profitability due to slow deployment of its technology by partners. Still, Fitch said its Stable Outlook for the bonds reflects Ocado’s record of “satisfactory liquidity management” and reducing refinancing risks.

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