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Saturday, 21 October 2017

Kraft Heinz serves up short-dated floaters

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Food conglomerate Kraft Heinz launched a rare US$1.5bn three-part floating-rate note issue in a market that usually sees corporate borrowers selling fixed-rate debt.

The company, which owns brands including Capri Sun, Lunchables and Jell-O, is selling the bonds to repay outstanding debt, which is also floating-rate, according to CreditSights.

Initial price thoughts were 3mL+45bp area for the two-year, 3mL+65bp area for the long three-year and 3mL+90bp-95bp area for the five-year.

By launch, those levels had squeezed in a touch to 3mL+42bp on a US$350m two-year, 3mL+57bp on a US$650m three-year and 3mL+82bp on a US$500m five-year.

With the issue, Kraft Heinz is thinking more about its M&A prospects than potential rate hikes, analysts said.

“They’re trying to keep the belly and the long-end of the curve open if they’re going to issue debt later on to finance an acquisition,” James Dunn, senior credit analyst at CreditSights, told IFR.

There has been widespread consolidation among companies in the packaged food sector, as consumers have drifted towards more natural, organic food choices - hurting the potential for organic growth elsewhere.

And Kraft Heinz has been right in the eye of that storm. The company went public with its appetite for acquisitions when it made a US$143bn offer for Unilever earlier this year, which was rejected.

Colgate-Palmolive and Mondelez International would also make sense as potential targets, according to CreditSights.

Any purchase would likely push leverage higher for Kraft Heinz, rated Baa3/BBB-. But while it’s in the bottom bracket of high-grade, the company has a solid reputation for quick delevering meaning it would likely maintain its IG rating in the event of any M&A activity, Dunn said.

“That doesn’t mean there’s not room for some volatility, but the market has already priced in a bit of M&A risk in the name,” he said.

Kraft Heinz last visited the high-grade market in 2016, when the company brought a US$5bn two-part bond with 10 and 30-year fixed-rate tenors.

 

PHASING OUT

M&A risk aside, Kraft-Heinz piqued investor interest by bringing three floating-rate tranches at a time when the Libor rate benchmark is set to be scrapped.

There is a risk that Kraft’s floating rate notes could effectively become fixed-rate if the Libor interest rate benchmark is phased out by the end of 2021, according to a report from Covenant Review, an independent credit research firm.

“Investors should consider whether these bonds should be guaranteed by subsidiaries,” the report said.

However, with tenors of two, three and five years, most of Kraft Heinz’s new bonds will have matured by the Bank of England’s 2021 Libor substitute deadline, Matt Brill, senior portfolio manager at Invesco, pointed out.

“It’s not a big deal for Kraft, as the majority of coupons will be paid before a Libor-replacement is issued,” Brill said. “But anything that has longer tenors where the status of Libor is uncertain will get a bit more focus.”

 

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