| Make foodmate.com your Homepage | Wap | Archiver
Advanced Top
Search Promotion
Search Promotion
Post New Products
Post New Products
Business Center
Business Center
 
Current Position:Home » News » Marketing & Retail » Food Marketing » Topic

Hillshire bondholders shrug off junk downgrade

Zoom in font  Zoom out font Published: 2014-05-14  Views: 11
Core Tip: Hillshire Brands bonds held steady on Tuesday even though the company was hit with a three-notch downgrade to junk credit status over its US$6.6bn acquisition of Pinnacle Foods.
Hillshire Brands bonds held steady on Tuesday even though the company was hit with a three-notch downgrade to junk credit status over its US$6.6bn acquisition of Pinnacle Foods.

Even as analysts decried the move to buy Pinnacle from private equity giant Blackstone, Hillshire's outstandings were on mostly even keel in the secondary market.

Its 2.75% US$400m unsecured bonds held up at a high cash price of 102.5, while the 4.1% September 2020s dropped about 3.5 points but were still trading around 102, an investor said.

Hillshire is planning to load US$4.8bn of new debt onto its capital structure with a new term loan B expected to finance the majority of the acquisition.

The company, which believes it will return to investment-grade status within three years, has committed debt financing in place with Goldman Sachs, according to a SEC filing.

But while the takeover will put Hillshire in a stronger market position, giving it key US food brands like Jimmy Dean and Birds Eye, not all observers were convinced.

"We are surprised with the size of the deal and management's willingness to fall into high-yield territory," said CreditSights analyst Edward Mui.

"Given the high leverage and soft operating outlook, we think HSH's credit ratings will fall to the low-BB area."

Fitch slashed Hillshire's credit rating by three notches to BB on Tuesday, estimating total debt-to-EBITDA will rise to mid-5.0 times based on pro forma EBITDA of around US$1.1bn.

Fellow rating agencies Moody's and S&P meanwhile said they may downgrade Hillshire's respective Baa2 and BBB ratings on expectations that leverage will soar from the takeover.

"The fact that the company said it intends to return to investment-grade within three years and take leverage back down to 3.5x may be playing a factor [in today's performance of the bonds]," said Carla Norfleet Taylor, a credit analyst at Fitch.

"But our preliminary numbers do not see a path to that happening within the three-year time frame," she said. "We need to see more details around the company's expected cash flow and the probable pace of debt reduction."

DEBT DOUBTS

Even as the company's bonds held steady, in fact, the cost of insuring that debt against default increased.

Hillshire's five-year CDS widened 15bp-20bp to around 140bp - and that still did not seem to reflect the magnitude of Fitch's three-rung downgrade.

While M&A issuance has been all the rage this year, particularly in the high-yield market, acquisitions have not typically involved a fall into junk-bond status.

"Most of the investment-grade re-levering, whether from M&A or other shareholder-friendly activities, have resulted in issuers staying in the investment-grade category - going in many cases from single-A to triple-B," said Michael Collins, a senior portfolio manager at Prudential.

Still, with intermediate BBB yields in the 3-4% area and BB yields coming in the 5% area, it is not that much more expensive to issue high-yield debt in the grand scheme of things, he said, and makes sense from a corporate finance perspective.

"Absolute borrowing costs are still attractive in the upper end of the high-yield market."

Fitch said it may downgrade Hillshire's ratings again, depending on the new capital structure, annual free cash flow and the potential pace of debt reduction for the new entity.

Hillshire may also look to refinance the 2015 bonds soon - which is when the impact of a junk rating would be felt most powerfully, as borrowing costs would be higher.

"They (Hillshire) might have to double the coupon to go from a short maturity BBB bond to a new 10-year BB deal," said Collins.

 
 
[ News search ]  [ ]  [ Notify friends ]  [ Print ]  [ Close ]

 
 
0 in all [view all]  Related Comments

 
Hot Graphics
Hot News
Hot Topics
 
 
Powered by Global FoodMate
Message Center(0)