Heinz bondholders jilted on Valentine's Day

Heinz bondholders experienced a major St Valentine's Day letdown after a deal was struck to take the company private.

The food company agreed to be acquired by Warren Buffett's Berkshire Hathaway and private equity house 3G for just over $23 billion, in a transaction worth $28 billion including debt assumption. The deal is one of the largest ever in the food industry.

Buffett's involvement is usually positive for his target companies, but on this occasion the effect on Heinz' credit standing has been the complete opposite.

Heinz' CDS spiked wider by a huge 116bps to trade at 160bps, comfortably exceeding the previous record level in December 2008. Indeed, Heinz' spreads widened far beyond Berkshire Hathaway's CDS, which were steady at around 100bps.

That the two firms aren't trading at similar levels is a big clue as to why Heinz' spreads have behaved in such a fashion. Berkshire Hathaway is putting up around $12-$13 billion of the buyout outlay; the remainder will be provided by 3G.

As the latter is a private equity house, it will finance the deal through a combination of cash, rollover of existing debt and, of course, new debt financing. The last, leveraged component explains the spike in Heinz' CDS spreads.

3G hasn't yet revealed what proportion of the deal will be financed by debt, or what form it will take - senior unsecured bonds or secured debt. What we do know is that Heinz was, until today, a very strong BBB credit with a robust balance sheet.

It had relatively low leverage and operates in a stable, non-cyclical sector. This was reflected in Heinz' CDS spreads - it traded with an implied rating of 'A', according to Markit data. It was Heinz' favourable financial position that no doubt made it an acquisition target.

Heinz' smaller rival Campbell Soup, which has an even stronger balance sheet, saw its spreads widen 11bps to 65bps as speculation mounted around which company was next in line for an LBO.

Elsewhere, a slew of positive earnings in Europe managed to offset the negative sentiment from exceptionally weak eurozone GDP data. The Markit iTraxx Europe was about 1bp tighter at 110.5bps.

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