Billionaire Warren Buffett's love of ketchup and hash browns is transforming H.J. Heinz Co. into the most-leveraged food maker in America.
Buffett's Berkshire Hathaway Inc. and 3G Capital Inc.'s $23 billion acquisition of Heinz may double the company's total debt to five times earnings before interest, taxes, depreciation and amortization, according to Fitch Ratings, the highest of any comparable food company. The cost to protect Heinz's debt from losses soared to a record after the announcement.
While Buffett has used takeovers to build Berkshire into a $249 billion company and burnish his reputation as the world's most successful investor, financing the deal with $14.1 billion in debt threatens to strip Heinz of the investment-grade rating that it's had for four decades. Fitch cut Heinz to junk on Feb. 15 and credit-default swaps imply a Ba1 rating, according to Moody's Corp.'s capital markets research group. That's two steps lower than its Baa2 rating from Moody's Investors Service and three below its BBB+ grade from Standard & Poor's.
The trading “underscores the hazards of high-grade bonds in an active M&A environment,” said Martin Fridson, chief executive officer of research firm FridsonVision LLC. Investors should be aware of the “inherent danger now that leveraged buyouts as well as strategic acquisitions are once again prominent in the financial landscape,” he said.
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Michael Mullen, a spokesman for Pittsburgh-based Heinz, didn't return a telephone message seeking comment.
Instead of boosting its credit profile to match Omaha-based Berkshire's AA+ and Aa2 ratings, Heinz was cut to junk in two days in the eyes of credit investors, Moody's data show. The swap prices, which climb as investor perceptions of creditworthiness deteriorate, rose to levels implying a Baa3 rating on Feb. 14, from Aa3 the day before. They fell again to Ba1 the next day.
Heinz's leverage may increase to five times or more after the takeover is completed from 2.5 times on Oct. 28, according to a Feb. 15 Fitch report in which the rating firm cut Heinz's credit grade to BB+. That would make the ketchup maker the most highly leveraged U.S. food manufacturer with a market value greater than $5 billion, data compiled by Bloomberg show.