Fitch first to rate Heinz junk as M&A financing details emerge

Fri Feb 15, 2013 1:38pm EST

Feb 15 (IFR) - Fitch Ratings on Friday became the first agency to downgrade H.J. Heinz Co into junk territory, a day after Warren Buffett's Berkshire Hathaway and 3G Capital said they will buy the ketchup-maker for $23.2 billion in cash.

Including the assumption of debt, Heinz valued the deal at $28 billion.

Fitch's action came as Heinz released details on the financing of the buyout with JP Morgan and Wells Fargo committing to provide the $14.1 billion of new debt required.

The banks will contribute $8.5 billion of US dollar senior secured term loan B-1 and B-2 facilities, $2 billion of euro/sterling senior secured term loan B-1 and B-2 facilities, a $1.5 billion senior secured revolver and a $2.1 billion second lien bridge loan.

Heinz also plans to roll over some existing debt that is not covered under change of control provisions for accelerated repayment.

The new debt financing is not expected to be secured by 'principal property' or other assets that cannot be pledged without triggering the equal and ratable clauses under the rolled over existing debt; therefore, the existing debt will not be pari passu with the new senior secured debt.

"Given the stability of the Heinz business and the marquee ownership group, I think this will be a pretty easy deal to get done. I wouldn't be surprised if people are already lobbing in commitments," said one loan investor.

Total equity investment is $16.24 billion. Berkshire Hathaway is committing a total equity investment of $12.12 billion consisting of $8 billion preferred (9% dividend), and $4.12 billion common equity. 3G will also invest US$4.12bn in common equity.

LEVERING UP

Market participants were expecting the Baa2/BBB+ rated company to be cut to junk as the $14 billion debt financing plan will push leverage higher.

Fitch pre-empted the two bigger rating agencies by slashing its corporate rating three notches to BB+ from BBB+ on Friday. Fitch also placed Heinz's ratings on watch negative, meaning it may downgrade the ratings even further.

The rating agency said leverage could increase to 5.0x or more from 2.5x at October 28, 2012, assuming an equity contribution in the 60% range and post-LBO debt of $10 billion or more.

"Despite the company's strong business profile and solid free cashflow generation, Fitch's views this substantially higher level of financial risk as not being commensurate with an investment grade rating," it said in a note.

The offer represents a 20% premium to Heinz's closing share price on Feb. 13, 2013, a 30% premium to the firm's one-year average share price, and translates to more than 13x Heinz's approximate $2.1 billion of EBITDA for the LTM period ended Oct. 28, 2012, said Fitch

Roughly $5.2 billion of debt, including hedge accounting adjustments at October 12, 2012 is expected to be assumed.

Moody's and Standard & Poor's put their ratings on review for downgrade on Thursday. S&P declined to comment on Friday.

The Heinz deal follows on the tails of Dell's $24 billion management buyout and Liberty Global's $16 billion purchase of Virgin Media, both of which will provide leveraged supply to the markets.

This is big news for the leveraged markets, which haven't seen any M&A deals over US$10bn in size since the financial crisis.

"Companies are sitting on significant cash balances, interest rates are historically low and there's pent up demand," said Claire O'Connor, head of Americas loan capital markets at Barclays.

"The market is wide open to provide financing for deals with appropriate capital structures. Conditions are ripe right now for both M&A and the financing."

Last year, use of proceeds in the high-yield market was dominated by refinancings, which produced roughly 60% of the total market volume. M&A volume accounted for close to 20% of deal flow.

This new supply is healthy, but how people view it largely depends where they are in the capital structure, said the investor.

"You are happy when you're on the right side of it, whether that's debt or equity."

Heinz bonds and CDS have deteriorated since the deal was announced.

Five-year credit default swaps have widened by 152bp to 186bp-197bp, while the HNZ 3.125% 2021s are 48bp wider at 120bp over Treasuries.

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