NEW YORK (Reuters) - Kraft Foods’ acquisition of Cadbury is expected to trigger the next blockbuster sale in the global corporate bond market as the company refinances an $11.5 billion bridge loan used to temporarily fund the deal.
The world’s second-largest food group, Kraft KFT.N is expected to have no trouble drawing demand for a bond sale, thanks to its investment-grade ratings, well-known brands and expected benefits from the Cadbury CBRY.L merger.
“I think the market is going to be very receptive,” said John Atkins, analyst at IDEAglobal in New York. “Just the underlying cash flow prospects of the combined entity will be enough to ensure that they have very ample market access,” he said.
Kraft last week sealed a friendly deal to buy British candy maker Cadbury after sweetening an initially spurned bid. Kraft increased a temporary bridge loan to 7.1 billion pounds ($11.5 billion) from 5.5 billion pounds to temporarily fund its higher offer.
The maker of Ritz crackers and Oreo cookies, Kraft will benefit from the growth prospects of Cadbury’s sweets business, which includes Dairy Milk chocolate and Trident gum, analysts said.
“Even when consumers are feeling less wealthy, they may not forego that dollar candy bar because it’s not killing their wallets,” said Craig Hutson, analyst at independent research service Gimme Credit. “It’s a relatively low-priced luxury item.”
BORROWING COSTS AT MULTI-YEAR LOWS
In a conference call on January 19, Kraft Chief Financial Officer Tim McLevish said the company will consider all sources to refinance the bridge loan but expects to use straight debt in a mixture of currencies.
Analysts said they expect Kraft to sell the bonds in more than one piece and to move soon while demand for corporate bonds remains strong, possibly after the company’s 2009 earnings report. Kraft has not announced a release date for earnings, but last year it reported on Feb 4.
A senior banker in London close to the deal said that about 50 to 70 percent of the bond financing could be ready to bring to market quickly.
“They’ve got a lot to do and the market certainly isn’t as ebullient as it was last month,” said Bob Bishop, senior portfolio manager at SCM Advisors in San Francisco.
After one of their best years on record, corporate bonds came under pressure last week as stocks suffered their worst three-day slide in 10 months on fears that a White House plan to curb bank risk-taking would cut profits.
Even so, the environment for issuing corporate bonds remains strong, with borrowing costs the lowest in more than five years.
Kraft’s success in keeping investment-grade ratings is also a plus for the bond sale. Rating agencies have Kraft on review for downgrade, but said they expect to keep the company above junk status because of its commitment to reduce debt.
Although Kraft’s ratings will be on the cusp of junk, it should still have no trouble selling bonds, said IDEAglobal’s Atkins. “You’re getting very little yield in risk-free assets,” he said. “The quest for yield is now down in quality.”
Still, analysts said they are cautious about near-term performance of Kraft’s bonds, since they have not yet weakened to account for the upcoming bond supply.
“We think the bonds should trade wider than they do,” said Gimme Credit’s Hutson.
Analysts at independent research service CreditSights also said Kraft’s bonds have downside risk.
While the acquisition makes strategic sense, expanding Kraft’s reach in developing markets, it will take some time to repair the company’s balance sheet, said CreditSights analyst Edward Mui.
Another hurdle for Kraft is that it is a frequent issuer, and many investors already own its bonds.
“I think a lot of people are in the same boat that we are, which is that we already have a nice position in it,” said SCM Advisors’ Bishop. “If they price it cheaply we’d be happy to buy more, but if they don’t, we’ll sit comfortably on what we own,” he said.
Additional reporting by Alex Chambers in London, Tom Ryan and Walden Siew in New York and Brad Dorfman in Chicago; Editing by Dan Grebler