Home Economy Kraft Heinz Junk Downgrade raises fear of corporate bonds again

Kraft Heinz Junk Downgrade raises fear of corporate bonds again


(Bloomberg) – Kraft Heinz Co., the legendary grocery giant founded five years ago in a merger, was downgraded to junk by Fitch Ratings, which raised new concerns among investors that a slowing economy would widen the broader corporate bond market could threaten.

The packaged food company has been lowered by one level to BB +, the first high-yield rating. A similar action by S&P Global Ratings or Moody’s Investors Service would officially describe Kraft Heinz as a fallen angel and remove him from investment grade indices.

Even though Kraft Heinz is a relatively small, investment-grade issuer with nearly $ 30 billion in debt, it would become one of the top three high-yielding issuers if another credit counselor follows Fitch. It is just one of many companies that have suffered a massive debt burden as a result of deals, thereby jeopardizing their creditworthiness.

The food giant, founded as part of a merger organized by Warren Buffett and the private equity firm 3G Capital, is in the midst of a turnaround as its brands fall out of favor with consumers. The company saw fourth quarter sales decline on Thursday, causing its bonds and stocks to fall. This is the latest sign that the company’s turnaround plan still has a long way to go.

“Kraft is investment grade like Velveeta cheese,” said Christian Hoffmann, portfolio manager at Thornburg Investment Management. “The ingredients determine what something is and Kraft Heinz is garbage.”

Keep dividend

Fitch has lowered the company by one level to the highest junk rating and has a stable outlook. Kraft Heinz may have to sell a significant portion of its business to reduce debt. Kraft Heinz will also need to cut its dividend, Fitch said in August, but the company said Thursday it would keep its $ 2 billion annual dividend to shareholders.

“We believe it is important for Kraft Heinz shareholders to maintain our dividend at this time of transformation,” said Michael Mullen, a company spokesman, in an emailed statement. Kraft Heinz continues to strive to reduce leverage “over time,” he said. The company plans to release a more detailed turnaround plan at the time of its next earnings report in early May.

Until then, the manufacturer of Jell-O and Classico pasta sauce has given patrons little reason to be patient. S&P rates the company one step above junk and reviews it for downgrading, while an equivalent rating from Moody’s has a negative outlook as of Friday.

Read more: Kraft Heinz on junk rating chopping block after weak earnings

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Kraft Heinz is one of many companies with a BBB rating, the lowest investment grade rating, which now accounts for half of the broader $ 5.9 trillion market. It has grown steadily since the financial crisis, as a decade of low interest rates caused companies to take on debt for mergers and acquisitions, often at the expense of creditworthiness.

But a wave of fallen angels that some investors fear remains to follow. Many strategists argue that BBB companies have the ability to defend their investment-grade ratings, whether by selling assets or cutting dividends. Companies like General Electric Co. and AT&T Inc. have done just that to prevent downgrades.

Kraft Heinz debts are already on the way to act like junk. The 4,625% bonds due in 2029 now amount to 3.6%, compared to 2.88% for an average BBB company with a similar term. It is the worst performing issuer on both the US and European markets on Friday, and the cost of protecting its debt against default has risen to the level last seen in October.

– With the support of Claire Boston, Tasos Vossos and Katherine Chiglinsky.

To contact reporters on this story: Molly Smith in New York at [email protected], Jonathan Roeder in Chicago at [email protected]

To contact the editors responsible for this story: Nikolaj Gammeltoft at [email protected], Sally Bakewell at [email protected], Larry Reibstein

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