Kraft Heinz is causing more headaches for its biggest shareholder and financial supporter, Warren Buffett’s Berkshire Hathaway.
Investors dumped bonds of Kraft Heinz Co last Friday after Fitch Ratings and then S&P Global lowered its credit rating of the company’s bonds into junk territory following a disappointing earnings report on Thursday.
Moody’s still rates it as investment grade but has a negative outlook which means a downgrade is coming.
The rating cut by the two companies means bond market index operators will now have to classify Kraft as below investment grade which will see many bond funds unable to hold the debt.
The weak performance in 2019 and the Fitch and S&P downgrade saw the shares fall 9% last week to be down more than 16% in 2020 so far. (and down more than 43% in the past year).
Kraft Heinz was created in early 2015 in a deal organised by Warren Buffett and the private equity firm 3G Capital. It has been an abject failure and destroyer of value for Buffett and Berkshire.
It is still in the midst of a turnaround but its brands have lost favour with consumers, leading to a loss of sakes, earnings and a big drop in the share price. That, in turn, saw Buffett and Berkshire write down the value of the 26% plus stake a year ago.
It reported a drop in fourth-quarter sales Thursday that sent its bonds and stock tumbling, the latest sign that the company’s turnaround plan still has a long way to go.
Organic net sales were down 2.2% year over year, while adjusted earnings fell 14.3%. The US, Canada, and Rest of World regions saw a decrease in organic sales, while Europe, Middle East, and Africa reported a small increase of 0.3%.
The value of Berkshire’s stake over the past year has fallen to about $US10.4 billion at the end of December, down from $US14 billion at the end of 2018. The stock was one of the worst performers last year.
Fitch cut the company one level to its highest junk rating and has a stable outlook. Kraft Heinz has $US29.2 billion of debt on issue.
Fitch said Kraft Heinz may need to divest a sizable portion of its business in order to reduce debt. Kraft Heinz also needs to cut its dividend, Fitch said in August, but the company said Thursday it would maintain the annual $US2 billion payout to shareholders, the biggest are Berkshire and 3G.
GE and AT&T have both cut dividends as their debt burden grows as sales slow or profit margins come under pressure.