Heritage Grocers’ Potential $1.5B Sale Likely to Be Funded With Private Credit as Grocery Sector Headwinds Put Off Banks

Private credit is the most viable financing option for bidders looking to acquire Apollo-backed Heritage Grocers, according to sources, who said banks are hesitant to fund the deal because of the grocery sector’s negative headwinds and notoriously low profit margins.

The company – which operates a chain of Hispanic-style grocery stores under banners such as Cardenas Markets and Tony’s Fresh Market – generates about $150 million in EBITDA, the sources said.

Third-party news outlets reported in October that Heritage was exploring a sale with UBS that could value it at roughly $1.5 billion, or 10x EBITDA.

Apollo formed Heritage Grocers in 2022 through the acquisition of California-based Cardenas Markets, which it merged with its existing portfolio company, Tony’s Fresh Market. The company sells Hispanic-style food items such as tamales and fresh-made tortillas at more than 100 grocery store locations across six states, according to its website.

Heritage has raised broadly syndicated loan debt in the past, so it is a familiar name for primary market investors. The company last tapped the BSL market in June 2023 with a $435 million add-on term loan due 2029 to fund its acquisition of Texas-based El Rancho Supermercado. The 2029 loan was quoted at 99.29 at the time, although it has traded down sharply over the last year, with most recent quotes coming in at 79/80, according to Solve.

The trade-down of Heritage’s loan reflects the company’s ongoing performance and liquidity pressures. Last spring, the borrower received a one-notch corporate credit rating downgrade by both Moody’s Ratings and S&P Global Ratings to B3/B-. Moody’s said in its note that Heritage’s downgrade was due to its “higher than expected leverage,” “disappointing free cash flow” and its “struggles to navigate a challenging consumer spending environment.”

In April, Octus also reported that Heritage was working with AlixPartners to address its operational issues.

Aside from Heritage’s specific liquidity issues, one lender who declined to finance the potential deal listed the rising cost of food items such as beef and the uncertain future of SNAP food benefits as other deterrents for banks, especially when coupled with the grocery sector’s historically low profit margins.

“Heritage is a nice business, but performance hasn’t been great, and it isn’t a clean story,” the source said. “Their margins are a little higher than other chains, but that’s not saying much – it’s too hard to suss out how inflation and SNAP benefits being cut will impact them.”

The source added that banks would be unlikely to provide debt financing for a potential Heritage buyout unless the acquiring sponsor were willing to put in an equity check of “at least” 60%.

“They’re an existing BSL borrower, but putting 5x leverage on a deal like this would be a no-go for most banks, so this one will be private credit all day,” the source said.

Heritage Grocers did not return a request for comment. Apollo and UBS declined to comment.