Uncategorized

Demand for yield creates opportunity for KHC

admin | September 13, 2019

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.

While the Kraft Heinz Company (KHC) needs to be reducing debt in order to bring leverage below 4.0x to stave off a downgrade to junk, management took advantage of new issue/yield demand to improve its maturity profile. KHC announced that it was tapping the debt market across the 10s/20s/30s maturities concurrently with the launch of a $1 billion tender for 2022-2025 paper and a $500 million partial redemption for its 2.8% 2020 notes. This is the second partial redemption announced this month for the 2.8% 2020 notes. Initial price talk on the new debt was very attractive at nearly 50 bp wide to existing debt, creating over $16 billion in demand across the tranches. KHC ultimately ended up pricing $3 billion in total at levels roughly 35 bp tighter from initial price talk. Strong demand for yield enabled KHC to allocate $1.5 billion to the 30-year tranche, while pricing $1 billion of a 10-year and $500 million of a 20-year. Subsequent to launching the new deal, KHC upsized its tender offer to $2.5 billion while maintaining the $500 million redemption, making the deal/tender leverage neutral.

The new deal/tender announcement comes on the heels of some debt reduction funded with asset sale proceeds. Most recently, KHC used proceeds from the sale of its Canadian Cheese business ($1.6 billion) to help fund the any and all tender of its 5.375% 2020 notes (of which $495 million were successfully tendered), as well as the redemption of its C$300 million 2.7% notes due 2020 and the $800 million partial redemption of its 2.8% 2020 notes. Between the tender/redemption announced this week as well as the debt reduction announced last week, KHC has made good progress in addressing its near term debt maturities, effectively buying them some time to come up with a strategy to stem the EBITDA decline and reduce leverage.

Exhibit 1: KHC 2020 debt maturity schedule

Source: KHC company filings, Bloomberg, Amherst Pierpont Securities

The Tender Offer

KHC launched a waterfall tender for $2.5 billion of bonds across four tranches of 2022-2025 debt with a combined $5.8 billion of principal outstanding. The tender has acceptance priority levels with KHC prioritizing its shortest maturities. Tender levels seem to be in line with recent tender offers at approximately 20-to-25 bp tighter than pre-tender trading levels. It is important to note that tender spreads include a $3 point early tender premium per bond. The early tender expiration date is set for 5pm NYC time on September 24, 2019, with the fixed tender spread reduced by the $3 point premium after the early tender expiration date.

Exhibit 2: KHC note tender – $2.5 tender cap

Source: KHC reports, Amherst Pierpont Securities

Leverage Remains High

Even with the recent debt reduction efforts, leverage remains high and is likely to remain elevated as debt reduction is not enough to offset the EBITDA deterioration. On a last twelve months (LTM) basis ended 6/29/19, estimated leverage was roughly 5.0x. Absent any further EBITDA declines in 2H, leverage should decline to the 4.7x area at year end with the recent debt reduction. However with full year EBITDA guidance pulled in 2Q, street estimates are now calling for KHC to end the year with EBITDA of roughly $6.0 billion, down from the $6.28 billion on a LTM basis at 2Q. That said, EBITDA declines would fully offset the debt reduction as KHC would end the year with leverage of 5.0x.

While new management has reiterated its commitment to IG ratings, KHC will likely take the rest of the year to figure out a strategy to best approach its operational issues and leverage. Absent any asset sales or further cut to the dividend, debt reduction is likely to remain muted. Should KHC choose to rely on asset sales for further debt reduction, the company’s margin profile could further be pressured if they choose to sell good assets in an effort to receive better valuations.

Relative Value

With tender spreads on average 20-to-25 bp tighter than pre-tender trading levels, the tender is an attractive opportunity to reduce exposure to the KHC name. Holders looking to participate in the offer are strongly urged to tender their bonds before the early tender expiration date. Given the duration of the bonds being tendered, the $3 point early tender premium represents all of the premium and then some, making it counter intuitive to participate in the tender post the early tender expiration date.

admin
jkillian@apsec.com
john.killian@santander.us 1 (646) 776-7714

This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.

Important Disclaimers

Copyright © 2023 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.

In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.

The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.

In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.

Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.