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
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
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
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
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
"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
This is big news for the leveraged markets, which haven't
seen any M&A deals over US$10bn in size since the financial
"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
"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
This new supply is healthy, but how people view it largely
depends where they are in the capital structure, said the
"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
Five-year credit default swaps have widened by 152bp to
186bp-197bp, while the HNZ 3.125% 2021s are 48bp wider at 120bp