(Bloomberg) -- Kraft Heinz Co. could end up as one of the biggest junk issuers if it doesn’t tame its debt load by mid-2021.
S&P Global Ratings said it could cut the packaged-food company to speculative-grade if it doesn’t boost earnings, pay down some of its more than $30 billion of long-term debt, or both. Roughly two-thirds of those borrowings currently sit in the Bloomberg Barclays high-grade company bond index, and, if cut, Kraft Heinz would be the third-largest issuer of dollar-denominated junk debt, according to data compiled by Bloomberg.
For now, the company’s debt is trading around investment-grade levels, implying that investors aren’t particularly worried about a downgrade. Kraft Heinz has steps it can take to maintain its ratings, including reducing or eliminating its dividend, S&P said. That could free up as much as $2 billion of cash a year to pay down debt. The rater also said Kraft Heinz could sell assets, but those plans appear to be on hold until management completes a comprehensive strategic review, said Bloomberg Intelligence.
Chief Executive Officer Miguel Patricio took the reins at Kraft Heinz this summer with a long road ahead. He inherited a company struggling to spruce up its brands and plagued by accounting issues. In his first earnings report as CEO earlier this month, Patricio suspended financial forecasts, which sent the company’s shares tumbling.
Kraft Heinz, backed by Warren Buffett, has said it’s committed to maintaining its investment-grade ratings, and debt investors seem to agree: the company’s 4.625% notes due 2029 trade at a risk premium of around 1.93 percentage points, below the average level of debt at the highest junk tier, which is 2.23 percentage points.
Email and voicemail messages seeking comment from Kraft Heinz weren’t returned.
With S&P joining Fitch Ratings in assigning a negative outlook, Kraft Heinz has inched closer to becoming a potential fallen angel, according to analysts at Bloomberg Intelligence. Late last year, investors had feared that a slew of high-grade issuers could cross the line into junk territory, as a decade-long binge on cheap debt has caused debt levels to soar.
Many companies, looking to boost revenue in a slow growing economy, borrowed heavily at low rates to finance acquisitions, often sacrificing credit ratings in the process. That’s led to rapid growth in the lowest tier of investment-grade debt, rated BBB, where now half of the $5.8 trillion market resides.
With economic growth showing signs of slowing, some of the largest investment-grade issuers have been focusing on cutting debt. AT&T Inc. chief executive officer said in January that reducing borrowings is the company’s top priority this year. Anheuser-Busch InBev NV cut its dividend. General Electric Co. has sold assets, while Mylan NV is combining with a Pfizer Inc. business.
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