The $10 billion of bonds H.J. Heinz Co. issued last week to finance its merger with Kraft Foods Group Inc. might not be a great deal for investors after all, according to Gimme Credit LLC.
The debt research firm wrote in a report Tuesday that investors should sell the new Heinz bonds, which were issued in seven parts, after earlier recommending that they buy the securities. Gimme Credit pointed to “elevated event risk,” in part due to declining revenue at Heinz and skepticism that the combined entity will be able to structure future deals that won’t end up hurting the company’s credit profile.
The bonds initially were a “home run” for buyers “with spreads gapping in significantly, reflecting the fact that Kraft has substantially lower leverage,” Gimme Credit analyst Dave Novosel wrote. However, demand has boosted their price to a point where investors need to think twice.
Heinz’s offering included $1 billion of 3.5 percent notes due in 2022, which after being issued at 99.8 cents on the dollar on June 23 traded as high as 100.33 cents Tuesday, according to Trace, the bond pricing system of the Financial Industry Regulatory Authority. Its $2 billion of 5.2 percent 30-year notes, which were sold at 99.6 cents, traded at 102.7 cents on Tuesday at 1:32 p.m. in New York.
“The significant appreciation of the existing bonds following the announcement of the Kraft merger validated our buy recommendation,” Novosel wrote. “Considering the very high leverage, the overhang of the integration expenses, and the weak growth prospects for revenue, we think spreads on the newly issued notes are too tight.”
Michael Mullen, a spokesman for Heinz, declined to comment.
Heinz, backed by Warren Buffett’s Berkshire Hathaway Inc. and Jorge Paulo Lemann’s 3G Capital Inc., announced a raft of management changes at Kraft yesterday, including the ouster of James Kehoe, Kraft’s chief financial officer. The companies have said that they expect to trim a combined $1.5 billion in annual costs by the end of 2017.