(Bloomberg) – Kraft Heinz Co., the iconic food giant created in a merger five years ago, has been demoted to junk by two credit reporters, raising new concern among investors about the slowdown economy that could threaten the broader corporate bond market.
The packaged food company was cut from BB + level by S&P Global Ratings, following Fitch Ratings earlier on Friday. He will now become a so-called fallen angel, removing him from the higher quality clues.
Although Kraft Heinz, with just under $ 30 billion in debt, is a relatively small investment grade issuer, it will become one of the top three high yielders. This is just one of the many companies that have found themselves in massive debt as a result of operations, jeopardizing credit scores in the process.
The food giant, created as part of an agreement orchestrated by Warren Buffett and private equity firm 3G Capital, is in the midst of a turnaround as its brands fall out of favor with consumers. He announced lower sales in the fourth quarter on Thursday, which pushed bonds and stocks down, the latest sign that the company’s recovery plan still has a long way to go.
“Kraft is investment grade like Velveeta is cheese,” said Christian Hoffmann, portfolio manager at Thornburg Investment Management. “The ingredients dictate what something is and Kraft Heinz is junk.”
This assessment is far from the era of the merger, when 3G embarked on a frenzy of high-level cost reduction which would ultimately produce greater profit margins. Instead, Kraft Heinz ended up with a team of tired brands and few new products that could appeal to consumer preference for more natural and less processed foods. Last year, it depreciated the value of its brand portfolio by more than $ 15 billion.
The turmoil has been a headache for Buffets Berkshire Hathaway Inc., whose stake in the past year has fallen to around $ 8.9 billion from $ 14 billion at the end of 2018. The headline was one of the worst performing last year.
S&P and Fitch reduced the company from one level to their highest rating. Kraft Heinz’s debt is already being negotiated like crap. Its bonds maturing in 2029 now earn around 3.5%, compared to 2.88% for the average BBB of similar duration. It is the worst performing issuer in the US and European markets on Friday, and the cost of protecting its debt from defaults reached a record high for the last time in October.
Fitch said Kraft Heinz may have to divest a significant portion of its business in order to reduce its debt. Kraft Heinz also needs to cut its dividend, Fitch said in August, but the company said on Thursday that it would maintain the $ 2 billion annual payment to shareholders. Fitch maintains a stable outlook, while that of S&P is negative. Moody’s is assessing the company a notch above the junk with negative prospects from Friday.
“We believe it is important for Kraft Heinz shareholders to maintain our dividend during this transformation period,” said company spokesman Michael Mullen in a statement sent by email earlier on Friday. Kraft Heinz remains committed to reducing leverage “over time,” he said. The company plans to release a more detailed recovery plan when it reports on earnings in early May.
Read more: Kraft Heinz on Junk Rating Chopping Block after low earnings
Kraft Heinz was one of several companies to achieve BBB, the lowest investment quality rating, which now includes half of the larger $ 5.9 trillion market. It has increased steadily since the financial crisis, as a decade of low interest rates has prompted companies to go into debt for mergers and acquisitions, often at the expense of credit ratings.
UBS Group AG strategists led by Matthew Mish predict there could be up to $ 90 billion in good debt to fall into high yield this year. That compares to just under $ 22 billion in 2019, almost a 20-year low, according to strategists at Bank of America Corp.
But a wave of fallen angels, which some investors fear, has not yet followed. Many strategists argue that BBB companies have the ability to defend their investment grade ratings, whether by selling assets or reducing dividends. Companies like General Electric Co. and AT&T Inc. have done just that to avoid downgrades.
(Updates with S&P downgrade everywhere)
– With the help of Claire Boston, Tasos Vossos and Katherine Chiglinsky.
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