Kroger got ahead of itself, and it turns out, the worm came with a redemption premium.
Highlights
- Special Mandatory Redemption terms require an issuer to buy back acquisition-financing bonds if the underlying deal falls through.
- Some SMR terms require redemption at par; others carry a premium, often around 101% of face value.
- Kroger issued $10.5 billion in bonds to fund its Albertsons acquisition, with $4.8 billion carrying a 101% Special Mandatory Redemption — a built-in $50 million cost if the deal stalled.
By Dan Wertman, originally published on the Noetica blog, now part of Thomson Reuters. January 2025.
Sometimes the early bird gets the worm. Sometimes it gets an extra $50 million cost that nobody’s talking about.
What Special Mandatory Redemption protects against
In the context of bonds issued to fund an acquisition, “Special Mandatory Redemption” terms require the issuer to buy the bonds back if the deal falls through. The mechanics vary: sometimes the bonds must be bought back at par, costing the issuer no extra premium for issuing early; other times, they must be bought back at a premium — often around 101% of face value — creating a real cost for having issued ahead of deal certainty.
The Kroger/Albertsons example
In August 2024, Kroger issued $10.5 billion of bonds to help finance its proposed acquisition of Albertsons. Despite numerous signs the deal was far from certain to close, Kroger chose to issue these bonds ahead of the merger closing — a move that eliminates execution risk and avoids funding a bridge facility in the meantime.
The cost of that head start: $4.8 billion of Kroger’s bonds carried a Special Mandatory Redemption at 101%. In other words, if the deal had fallen through, Kroger wouldn’t just have had to give the money back — it would have had to give it back plus a $50 million premium on top.
For more deal-term benchmarking like this, explore the latest Capital Markets Radar Report from Noetica, now part of Thomson Reuters.
