The owner of Asda faces a sharp increase in the cost of servicing its £4bn debt pile early next year, its bosses have told MPs as they were questioned over the retailer’s finances.
The group faces a £30m rise in debt costs in February, when the fixed interest rate on a sixth of its £4.2bn debt pile expires.
MPs on the business and trade committee questioned the supermarket’s executives over its finances, more than two years after its debt-laden takeover by the billionaire brothers, Mohsin and Zuber Issa, and the private equity group TDR Capital.
MPs pointed out that the acquisition of Asda, the UK’s third-largest grocer had brought a debt of more than £4bn on to the chain’s books. Since then, borrowing conditions have deteriorated, leading to two credit rating downgrades.
Appearing before the committee, Asda co-owner Mohsin Issa defended his running of the company, which he said had “chosen to invest in customers”, including spending £140m on price cuts to help with the cost of living crisis, at the expense of profits.
He said staff at Asda – which employs 151,000 people across the UK – had received two pay rises of 8% and 10% since the takeover. “We chose to invest, and that’s why we were downgraded.”
When MPs expressed concerns about the cost of servicing the debt pile, Michael Gleeson, the supermarket’s chief financial officer, explained that most of the total debt of £4.2bn held by Asda’s parent companies was at fixed interest rates that expire in 2026 or 2027.
However, £700m will float next February, leading to a likely increase of £30m in interest payments, if the rate increased by four to five percentage points, he told MPs, who were hearing evidence on the role of private equity and the retail sector.
Issa insisted that the company’s accounts were “clean,” and that there was no gap in its reported operating costs. Back in July, Issa was unable to explain to the committee why there was a £1.7bn gap between the operating costs declared by Asda, and analysis of its operating costs.
On Tuesday, Gleeson stepped in to explain that UK accounting standards required Asda to report the total spent on wages, depreciation of its assets, and the cost of its good sold.
He said the £1.7bn referred to other costs – business rates, property maintenance, energy and utility bills, marketing costs, the cost of implementing a new IT system, and insurance.
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Issa said he disagreed with the Financial Times’s description of the group as having a complex capital and ownership structure including offshore vehicles and financial engineering.
Gleeson defended the use of holding companies based in Jersey, stressing that it pays UK corporation tax on all its operations. He added: “Companies registered in Jersey can, in the longer term, facilitate corporate restructurings more quickly than can happen in England and Wales.”
MPs also heard that Asda had been looking for a new chief executive for 18 months. Issa said he wanted to find the best candidate, and insisted that he was “best qualified” to oversee the new IT system.
