This was written by Bloomberg’s Business Manager for Credit Risk – David Croen and Head of Quantitative Risk Analytics – Harvey Stein.
Can you reliably know if Kraft Heinz is a credit risk today?
Kraft Heinz missed most analyst estimates when it reported adjusted earnings of $0.84 per share in February. It was under the consensus forecast by more than 10 percent, and the company took a $15.4 billion non-cash charge to write down the value of multiple assets, including Kraft and Oscar Meyer. Its dividend was cut to $0.40 per share to help pay down debt.
At the same time, the company confirmed it was the target of an SEC probe, which led to a proposed class action in March.
Shares dropped 27 percent the day of the announcement, and investors who focused on credit ratings would not have seen any warning signs of this decline: The company’s most recent ratings change was an upgrade to BBB 11 months earlier.
Could this have been predicted?
Kraft Heinz is seeing challenges to some of its iconic brands, due to pressures from competing products, and consumer concerns over its processed and sugary foods.
Historically, the company is known as a cost-cutter, but its rebound may require new resources and investments. Recent efforts including the launch of Oprah’s “O, That’s Good” line, are specifically targeting customer’s changing tastes, but more may be needed.
“One particular launch isn’t going to move the needle,” says Morningstar Analyst Erin Lash.
For investors, predicting success could require new tools like Bloomberg’s Default Risk (DRSK) function, which relies on a broader look at the market. DRSK creates a standardized view of company risk, issuer’s default risk, the probability of default and credit default swap spreads.
Kraft Heinz, for example, had a default risk grade of IG1, the highest level in Bloomberg’s credit scoring system, for much of 2018. However, starting in September, DRSK began showing degradations in credit quality, and its November score put Kraft Heinz lower at an IG4 (currently, it is scored even lower, at IG9). Seeing this could have led investors to investigate what could be causing such a deterioration.
Tracking credit quality
Bloomberg Default Risk covers about 290,000 private and 74,000 public companies. It utilizes a standardized, clear view of credit health to remain objective and transparent. Analysts can rely on the data to gain a clearer picture of the key drivers of credit risk.
It also allows users to overwrite fundamental and market data inputs in an analysis, making it easier to evaluate scenarios and see how those changes may affect credit risk. Daily updates ensure that your view reflects changes in the market and fundamental company data.