Heinz Default Swaps Rise to Record on Berkshire, 3G Capital Deal

Credit-default swaps protecting HJ Heinz Co.’s debt soared to a record high after Warren Buffett’s Berkshire Hathaway Inc. and Jorge Paulo Lemann’s 3G Capital agreed to buy the ketchup maker for about $23 billion.

Five-year credit-default swaps on the Pittsburgh-based company’s debt climbed 130 basis points to 173.4 basis points at 4:31 p.m. in New York, according to prices compiled by Bloomberg. That’s about four times the level of the contracts before the deal was announced.

The transaction will be financed with cash from 3G affiliates, plus the rollover of existing borrowings, and is valued at about $28 billion including debt, according to a statement today. Berkshire will spend about $12 billion to $13 billion on the deal for the maker of Ore-Ida potato snacks.

“Looks like the deal will involve approximately $5 billion in new debt which would almost double Heinz’s debt load,” Anthony Valeri, a market strategist at San Diego-based LPL Financial that oversees $350 billion of assets, said in a telephone interview. “I think the CDS move reflects uncertainty over exactly how much more levered Heinz will be after the transaction.”

Heinz’s $300 million of 1.5 percent notes due March 2017 dropped 2 cents to 98.8 cents on the dollar, to yield 1.8 percent, at 4:30 p.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Valentine’s ‘Letdown’

“Heinz bondholders experienced a major St. Valentine’s Day letdown after a deal was struck to take the company private,” Gavan Nolan, an analyst at Markit Group Ltd., wrote in a report.

A gauge of U.S. corporate credit risk held as gross domestic product slumped in the euro area and as initial jobless claims fell in the U.S.

The Markit CDX North American Investment Grade Index, a credit-default swaps benchmark that investors use to hedge against losses or to speculate on creditworthiness, rose 0.03 basis point to a mid-price of 85.9 basis points at 4:53 p.m. in New York, according to Bloomberg prices.

The credit-swaps index typically rises as investor confidence deteriorates and falls as it improves. The contracts pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

Corporate Defaults

The risk premium on the Markit CDX North American High Yield Index increased 0.3 basis point to 435.5 basis points, Bloomberg prices show.

Eleven issuers have defaulted globally so far this year, a report from Standard & Poor’s said today. Eight of the companies were based in the U.S., two in Europe and one in the emerging markets.

Some of the reasons for defaults were distressed exchanges, missed payments and bankruptcy filings, the report said.

The average relative yield on speculative-grade or junk-rated debt rose 3.4 basis points to 504.2 basis points, according to Bloomberg data.

High-yield, high-risk debt is rated below Baa3 by Moody’s Investors Service and less than BBB- at S&P. A basis point is 0.01 percentage point.

(For more on the Heinz deal, visit EXT5.)
    Before it's here, it's on the Bloomberg Terminal. LEARN MORE