Kraft Heinz bonds widen on Unilever bid
Bonds of Kraft Heinz widened on Friday after the company made a US$143bn takeover bid for Unilever, raising concerns that it may raise billions of debt to fund the purchase.
Even though the offer was quickly rebuffed by Unilever, which said it saw no financial or strategic merit in the deal, Kraft Heinz said it looked forward to “working to reach agreement on the terms of a transaction.”
That was enough to unsettle Kraft Heinz bondholders, who fear a potential deal will result in much higher leverage for the ketchup and cheese maker. Kraft Heinz net leverage stood at 3.6 times as the end of 2016.
“How are they going to pay for it? They will probably have to issue debt,” said one buyside trader of the proposed transaction.
Kraft Heinz’s 4.375% 2046 bond – the most traded bond of the day – was 15bp wider at a Treasury spread of 182bp in the early afternoon, according to MarketAxess data.
Some of the company’s other bonds, meanwhile, were anywhere between 7bp and 17bp wider on the day.
While Kraft Heinz’s ratings are just one notch above junk territory at Baa3/BBB–/BBB–, Unilever’s credit ratings sit five notches higher at A1/A+/A+.
In the event of a merger, Unilever’s stronger credit profile would partly offset the negative impact of a substantial increase in debt.
That could allow the company to maintain its investment-grade ratings – a commitment that management reiterated on an earnings call with analysts this week.
“They would structure a deal in a way that they would remain investment-grade,” said the trader. “That’s why their spreads are moving wider but not getting trashed.”