Kraft Heinz faced the consequences on Friday of its decision to maintain dividend payouts to Warren Buffett and other shareholders despite its $28bn debt burden, as two credit rating agencies cut their rating on the food company to junk status.
The downgrades extended a sharp sell-off in Kraft Heinz bonds, threatening to elevate the company’s borrowing costs by removing the securities from investment-grade indices.
The junk ratings underline the group’s fall from grace since the combination of Kraft and Heinz, a deal engineered by Mr Buffett and Brazilian-US investment group 3G Capital that promised to transform the global food industry.
Shoppers have been shunning packaged foods in favour of fresher and trendier alternatives, leaving Kraft Heinz to grapple with falling sales and a $28bn debt burden, a legacy of the 2015 mega-deal that created it.
Directors this week kept the company’s quarterly dividend on hold despite another batch of weak results, surprising some investors who had expected more urgent action to reduce its financial leverage.
Explaining the decision to cut the company’s credit rating one notch from triple B minus to double B plus, S&P cited the company’s “unwillingness” to cut its dividend. It also said there had been “significant mismanagement” at the company in recent years.
Fitch, which reduced its rating to the same level, warned that Kraft Heinz may need to raise $9bn from disposals to reduce leverage to the levels that executives have said they are targeting.
If maintained throughout the year, the 40 cents quarterly dividend would cost the company an estimated $2bn and be worth about $500m to Mr Buffett’s Berkshire Hathaway, which holds a near-27 per cent stake. 3G owns 20 per cent.
Kraft Heinz said in a statement on Friday: “We believe it’s important to shareholders to maintain our dividend during this time of transformation. We also remain committed to reducing leverage over time as we reposition the company for sustainable growth and returns.”
The food group’s problems have brought scrutiny to 3G’s management techniques and critics on Wall Street have complained it became too reliant on cost cuts to drive returns. Kraft Heinz is wrestling with demands from shareholders and credit rating agencies at the same time as it tries to invest in marketing and product improvements.
Moody’s, a third agency, on Friday kept its investment grade rating intact but put Kraft Heinz on notice for a possible future downgrade as it reduced its outlook on the debt to “negative”. It said the company had underinvested in key brands and now had to plough funds into the business to improve revenues.
The rating agency said the steps that were required to do so would “reduce operating profit margin and sustain upward pressure on financial leverage” for at least the next year.
S&P said the company had demonstrated a “lack of commitment to meaningfully deleverage” over the next year. It also cautioned that asset sales may be no panacea, depending on the prices fetched and profits foregone.
A Kraft Heinz corporate bond maturing in 2046 fell again on Friday after a decline on Thursday, to leave it changing hands at about 92 cents. It had been trading above 102 cents on the dollar earlier in the week.
The company’s shares, meanwhile, closed down 3 per cent, bringing the fall in market value to about 38 per cent since the start of 2019.
Paulo Basilio, Kraft Heinz chief financial officer, said this week that the company was not prepared to “sacrifice necessary investments in the business”. He said: “We are even more confident in our long-term prospects behind the new strategy, portfolio prioritisation, and growth initiatives.” Further details would be unveiled in May, he said.