Asda Group Credit Analysis: Highly Levered UK Grocer at Critical Juncture

Background:

• • Asda (Bellis Finco PLC), UK food and general merchandise retailer headquartered in Leeds; FY24 EBITDA (IFRS-16) £1.141bn; Total Net Leverage (TNL) varies materially by lease treatment: c.7.3x on IFRS-16 net debt and c.3.36x on pre-IFRS-16 external net debt; no public corporate ratings disclosed
• • Operates large-format supermarkets, supermarkets, convenience (Asda Express), online grocery and George clothing across the UK only
• • FY24 EBITDA £1.141bn; yoy trend pressured at the P&L level due to £714.4mm non-underlying items driving an IFRS operating loss; FY24 EBITDA margin 4.3% on £26.847bn revenue
• • Leadership: Executive Chairman Allan Leighton (appointed in 2024); CFO Michael Gleeson (director appointed 11 Nov 2024); directors R. Hattrell (appointed 11 Nov 2024). Z. Issa resigned 31 Oct 2024; M. Issa resigned 19 Dec 2024
• • Clean EBITDA definition and logic (used for leverage and rating view):
• – Start from reported EBITDA (IFRS-16) £1,141mm
• – Exclude any pro forma/synergy add-ons and future "cash adjustments" (company discloses Pro Forma Adjusted EBITDA £1,235mm and a separate £211mm Pro Forma Cash Adjustment intended for 2025). These are not cash-earned in FY24; remove them to avoid overstating capacity
• – Clean EBITDA (IFRS-16, no synergies/cash adjustments) = £1,141mm
• • Segmental breakdown: Reported revenue ex-fuel was £21.713bn in FY24 vs £21.898bn in FY23; non-fuel retailing (grocery, general merchandise, George clothing, online) is the core EBITDA driver
• – Fuel, pharmacy/optical and other services are lower-margin contributors; convenience (Asda Express) and wholesale are being scaled but integration costs and execution risk are non-trivial
• – Management presents a material portion of EBITDA via adjustments (Adjusted and Pro Forma Adjusted EBITDA). Key EBITDA generation remains anchored in the core grocery proposition; non-food and services are supportive rather than primary profit engines
• • Geographic breakdown: 100% UK; no international earnings diversification. This concentrates macro, regulatory and competitive risk in one market
• • Revenue model and contractual structure: Purely retail price/volume model with daily/weekly transactions; no long-term customer contracts or inflation pass-through clauses
• – Pricing power is constrained by discounters and the UK's price-sensitive environment; gross margin (24.3% in FY24) leaves limited room for error
• – KPIs worth noting: Like-for-like sales ex-fuel declined 3.4% in FY24 vs +5.4% in FY23. Online and click & collect remain strategically important but are not disclosed with profitability detail; mix shifts can pressure store operating leverage
• • Cost structure: FY24 COGS £20.325bn (75.7% of revenue); gross profit £6.521bn; gross margin 24.29%
• – Operating cost base is a mix of semi-fixed (store labor, logistics, energy, IT separation costs) and fixed (property-related lease commitments under IFRS-16); flexibility is limited in the short term
• – Personnel costs are significant but not disclosed as a separate line; energy, logistics and shrink are important levers; IFRS-16 accounting removes rent from EBITDA and replaces it with D&A and interest, inflating EBITDA vs cash rent obligations
• • Shareholders and valuation: Majority owner: TDR Capital LLP; minority shareholder: Mohsin Issa. Private company. Walmart sold Asda in 2021 for an enterprise value of £6.8bn (debt-free, cash-free) at closing; no current public market capitalization. Peers (UK grocers) historically trade mid-single-digit EV/EBITDA (6-7x); Asda's heavy lease-adjusted leverage and integration/separation risks would argue for a discount vs best-in-class peers if it were public
• • Strategy:
• – Seven-point plan under new Executive Chairman including: sharpen value (5–10% better value target), availability, fresh food differentiation leveraging IPL, strengthen George clothing, improve service and store environment, refresh stores, and develop winning channels (online and convenience)
• – Separation from Walmart (Project Future), stand-up of independent IT, and integration of acquired c-store assets (Arthur Foodstores, Euro Garages Jersey/Asda Express) are multi-year, execution-heavy programs with cost and risk
• – Capital allocation prioritizes market share recovery and productivity; management plans a £300mm debt repayment in Q1 FY26 funded from cash
• • Competitive landscape:
• – UK grocery remains intensely competitive with Tesco, Sainsbury's, Aldi, Lidl and Morrisons. Discounters continue to pressure price architecture and mix. Asda's stated ambition is to regain market share, but like-for-like ex-fuel was negative in FY24, highlighting the challenge
• – Corporate actions: Significant FY24 non-underlying costs (£714.4mm) including separation, impairments and other items pushed operating results to a loss
• – May 2024 completed major refinancing of c.£3.4bn of debt; Q4 2024 board/management changes; continued integration of convenience acquisitions from 2023
• – FY24 like-for-like ex-fuel decline and elevated finance costs constrained earnings quality; dividend policy remains conservative at the HoldCo level
• • Current trading: FY24 revenue £26.847bn (+£1.230bn yoy); IFRS operating loss £43.6mm due to non-underlying items; pre-non-underlying operating profit £670.8mm
• – Finance costs £611.3mm and non-underlying items drove a loss before tax of £599.0mm; income tax credit on non-underlying items reduced the net loss to £487.2mm

Risks and mitigants:

• • Customer concentration: None; diversified mass retail customer base
• • Large EBITDA adjustments: Yes. Company discloses Adjusted and Pro Forma Adjusted EBITDA; FY24 Pro Forma Adjusted EBITDA £1,235mm includes run-rate/synergy benefits not in FY24 cash; £211mm "Pro Forma Cash Adjustment" is future-dated. Clean EBITDA strips these out to £1,141mm. The reliance on sizable adjustments reduces transparency and increases execution risk
• • Cyclicality: Food retail is relatively resilient, but UK consumer real income, energy bills and mortgage costs influence basket size and mix. FY24 like-for-like ex-fuel declined 3.4%, showing sensitivity in a tough macro. Asda navigated the pandemic with stability but is now facing discounter-driven pressure
• • Litigation/provisions: Equal Value pay claims and other regulatory matters exist in UK retail generally; disclosures note legal/compliance risks; no quantified exceptional provision disclosed here, but risk remains non-trivial
• • FCF and leverage risk: Despite an IFRS net loss, FY24 cash flow from operations was £991.1mm; capex £379.7mm; management APMs indicate Underlying FCF £817mm and Total FCF £564mm, which are positive. However, lease-adjusted TNL is elevated, and finance costs £611.3mm compress coverage
• • Regulatory risk: UK GSCOP, competition scrutiny, food safety, H&S, ESG. Pricing strategies and promotions face public and political attention; compliance costs are persistent
• • Geopolitics/tariffs: FX risk given USD/EUR-sourced goods; hedged via forwards; residual exposure remains
• • Technology/separation risk: Walmart separation and new IT stack carry cutover and continuity risk; management highlights mitigation plans but this is a key operational risk
• • Supply Chain Finance: Reverse factoring used. At FY24, amounts payable to SCF banks and participating suppliers £663.5mm; of which £477.6mm payable to SCF banks; unused SCF facilities £115.7mm; payment terms 6–120 days. A reduction in SCF availability would be a working capital headwind
• • Past financial distress/restructuring: None disclosed; debt refinancings completed in 2024; covenant tested only if RCF drawn ≥40% of facility, and not required in period

Capital structure:

• • Total gross debt (IFRS-16 included): £9.154bn at FY24 comprised of external borrowings (bonds/loans) and lease liabilities; cash and equivalents £823.5mm
• • External borrowings and key instruments:
• – RCF £667.3mm maturing 16 Aug 2025; undrawn at FY24
• – Senior Secured Notes £302mm due Feb 2026
• – Senior Notes £500mm due Feb 2027
• – Apollo Facility £684mm due 2029
• – Additional Term Loan B debt maturing 2031; interest rate risk hedged via SONIA/EURIBOR swaps
• • Net debt and TNL:
• – IFRS-16 net debt (using short-term debt £159.7mm + long-term debt £8,994.7mm – cash £823.5mm) ≈ £8.331bn; Clean EBITDA (IFRS-16) £1.141bn → IFRS-16 TNL ≈ 7.3x
• – Pre-IFRS-16 external net debt per company APMs £3.831bn; same Clean EBITDA (IFRS-16) is not strictly like-for-like for this ratio, but investors often view leverage on external debt vs pre-IFRS-16 EBITDA. Company-presented leverage was c.3.0x–3.1x on their adjusted basis; our like-for-like external net debt to Clean EBITDA proxy is c.3.36x using £3.831bn/£1.141bn
• • Interest and coverage:
• – FY24 finance costs £611.3mm (IFRS-16, includes lease interest); EBIT (pre-non-underlying) £670.8mm → thin EBIT/interest coverage near 1.1x; on a net interest basis excluding lease effects (company line "Interest income/expense" £280.9mm), coverage would be higher but is still modest for the risk
• • Weighted Average Cost of Debt (WACD):
• – Not directly disclosed; swaps fix a large portion of SONIA/EURIBOR exposure through 2027; FY24 finance costs £611.3mm reflect elevated base rates and lease interest burden
• • Near-term maturities and management plan:
• – RCF maturity Aug 2025; notes of £302mm due Feb 2026; management plan includes a £300mm repayment in Q1 FY26 from cash reserves; refinancing readiness is essential in 2025
• • Contingent liabilities/provisions:
• – Legal/regulatory exposures typical for UK grocers; no quantified contingent liability disclosed here that would change leverage metrics
• • Supply chain finance:
• – SCF payable balances at FY24: total £663.5mm; payable to SCF banks £477.6mm; unused SCF capacity £115.7mm. Terms 6–120 days; concentration across multiple institutions mitigates counterparty risk
• • Total liquidity:
• – Cash £823.5mm plus undrawn RCF £667.3mm → total available liquidity c.£1.491bn at FY24

Conclusion:

• • FCF outlook:
• – FY24 operating cash flow £991.1mm and management APMs indicate Underlying FCF £817mm and Total FCF £564mm despite an IFRS net loss, supported by working-capital management and add-backs. However, FY24 like-for-like ex-fuel fell 3.4%, finance costs were £611.3mm, and non-underlying opex was heavy. Sustaining FCF will require volume recovery, disciplined capex (~£380mm in FY24), and delivering cost/productivity gains without relying on pro forma add-backs
• • Valuation and capital mix:
• – There is no current public EV. The 2021 transaction valued Asda at £6.8bn EV. Against FY24 external net debt of £3.831bn, debt represented ~56% of that historical EV; on IFRS-16 net debt of ~£8.331bn, lease-adjusted debt would exceed that 2021 EV, underscoring the economic burden of lease commitments
• • Sustainability of capital structure:
• – On external net debt, leverage in the low-3x range is serviceable if Clean EBITDA stabilizes and FCF remains positive; however, thin EBIT/interest coverage, execution on separation/integration, and market-share headwinds keep risk skewed to the downside
• – On IFRS-16, lease-adjusted TNL ~7.3x is high for the grid. Lease commitments are long-dated and partially fixed by rent contracts, limiting flexibility in a downcycle
• • Indicative rating (Moody's/S&P) based on Clean EBITDA and leverage:
• – Using external net debt/EBITDA ≈ 3.36x and modest coverage, we would locate Asda around Ba2 (S&P BB) on the grid, reflecting: single-country exposure; mid-20s gross margin; high competitive intensity; positive but not robust FCF; reliance on adjustments
• – On a fully lease-adjusted (IFRS-16) basis with TNL ~7.3x and EBIT/interest near 1.1x, the standalone profile drifts toward Ba3/B1 territory. We anchor at Ba2/BB to reflect grocery resilience, scale (£26.847bn revenue), liquidity (£1.491bn), and the expectation of some operating recovery, offset by execution and competition risks
• • Bottom line:
• – Credit story hinges on stabilizing like-for-like, extracting productivity to defend margin, de-risking separation/integration, and maintaining liquidity through 2025–2026 maturities. We would monitor: trajectory of Clean EBITDA, interest coverage, and whether adjustments shrink materially. Under our Clean EBITDA lens, Ba2/BB feels appropriate today with a cautious outlook until operational momentum clearly improves