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Kraft Heinz Put on Notice by S&P: Cut Debt or Risk Being Junked

Jonathan Roeder and Claire Boston

(Bloomberg) -- Kraft Heinz Co. could be hit with a junk credit rating by mid-2021 if it fails to turn itself around, S&P Global Ratings said Friday.

S&P said results for the maker of Kraft Macaroni & Cheese and Heinz ketchup have been weaker than it expected, and the company needs to cut debt relative to a measure of earnings. The credit grader said it is worried about the risks Kraft Heinz could face in the second half of 2019, including higher commodity costs and lower stocking at retailers.

Kraft Heinz carries the lowest investment-grade rating from all three major graders. With about $30.3 billion of long-term debt outstanding, the company is among the 20 largest issuers of debt in the lowest tier of investment-grade, excluding financial companies.

If Kraft Heinz were downgraded by at least two credit graders, it would fall into junk bond indexes, making it one the biggest issuers of high-yield debt. A growing number of corporations have debt rated in the lowest investment-grade tier, between BBB+ and BBB-, stoking fears from some investors that hundreds of billions of debt could fall to junk status if companies struggle.

Bond Pressure

Risk premiums, or the extra yield investors demand for buying a company’s bonds instead of Treasuries, edged higher for some of Kraft Heinz’s most actively traded bonds on Friday. That spread rose by 0.03 percentage point for the company’s bonds maturing in 2029 with a 4.625% coupon, to 1.93 percentage point according to data provider Trace. The company’s high debt levels and doubts about the long-term success of its cost cutting efforts could pressure its bonds to weaken further, Bloomberg Intelligence analysts wrote in a note.

Kraft Heinz shares had fallen 1.2% to $25.31 as of noon in New York trading. The stock had already lost 41% of its value this year through Thursday’s close.

Speculative-grade ratings can make it more expensive for companies to fund daily business and harder to weather economic cycles. Warren Buffett-backed Kraft Heinz has said it’s committed to maintaining its investment-grade ratings. Email and voicemail messages to Kraft Heinz seeking comment weren’t immediately returned.

Fixing Problems

Kraft Heinz is still trying to move past myriad issues that have hammered its shares this year. The company has struggled ever since its bid to buy Unilever collapsed in 2017, and in February, it announced a $15.4 billion writedown on the value of its brands and a subpoena. Its own internal investigations have also revealed accounting issues, and it had to restate results going back to 2015.

As the company tries to turn things around, it announced new leadership: Longtime Anheuser-Busch InBev executive Miguel Patricio replaced Bernardo Hees as chief executive officer this summer. But he has an uphill battle ahead: He said earlier this month that Kraft Heinz needs a “comprehensive strategy,” but that he didn’t have enough confidence to issue guidance at this time. The company also withdrew its previous guidance for a key measure of results, earnings before interest, taxes, depreciation and amortization, and investors sent the shares tumbling.

S&P said Kraft Heinz could take steps like boosting income, selling assets, or reducing or eliminating its dividend to reduce debt levels relative to earnings.

(Updates with comment from Bloomberg Intelligence in fifth paragraph.)

--With assistance from Deena Shanker.

To contact the reporters on this story: Jonathan Roeder in Chicago at jroeder@bloomberg.net;Claire Boston in New York at cboston6@bloomberg.net

To contact the editors responsible for this story: Anne Riley Moffat at ariley17@bloomberg.net, Dan Wilchins, Nicole Bullock

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