Morrisons’ pension trustees warn current bid would ‘materially weaken’ sponsor covenant

The trustees of the Morrisons Retirement Saver Plan and the Safeway Pension Scheme have warned that the proposed Morrisons acquisition deal, in its current form, would “materially weaken” the existing sponsor covenant supporting the schemes.

In a statement, the trustees warned that the offer Morrisons’ board of directors intends to recommend from Clayton, Dubilier and Rice (CD&R) could weaken the sponsor covenant if no agreement is reached to provide additional protection for the schemes.

The trustees cited “several factors”, including 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.

Although the schemes are in surplus on an ongoing funding basis, they do not currently have the resources to secure a buyout.

The trustees expect to be able to achieve full funding on a buyout basis in less than 10 years without further cash contributions from Morrisons beyond those already agreed, but warned that this was dependent on the Morrisons Group companies that participate in the schemes to support members' benefits.

The scheme trustees are now focusing on agreeing additional security to provide covenant support on their journey to buyout.

They had been in discussions with a previous bidder, Fortress, but have not had the same opportunity to progress multiple discussions with CD&R.

A “helpful introductory meeting” had taken place between the trustees and CD&R prior to the announcement of its offer, and the trustees are looking for to further talks about an appropriate mitigation package with CD&R “as soon as possible”.

“The trustees are of the view that an agreement on the mitigation to be provided for the schemes should be settled with CD&R or Fortress (as appropriate) prior to any shareholder meeting to consider any offer for Morrisons,” the statement added.

Commenting within the statement, Morrisons Retirement Saver Plan and the Safeway Pension Scheme chair of trustees, Steve Southern, 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."

The aggregate Section 75 deficit of the schemes, as at 31 May 2021, was estimated at £800m.

The statement from the trustees was published by Morrisons, with the supermarket stating: “Morrisons 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.

“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.”

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