- Tranches with no change-of-control provisions
- Amounts to 20 percent of Heinz’s debt
- “Deep subordination” of investment grade debt
The credit rating agency estimated that $870 million of Heinz’s existing bonds, about a fifth of the manufacturer’s $4.2 billion debt, lack change-of-control provisions that would require the buyers to pay them off. These bonds were issued before 2008, when the growing number of take-privates during the boom years of LBOs caused more investment-grade issuers to include change-of-control covenants, Moody’s said.
As a result, the holders of that Heinz investment grade debt are likely to find themselves pushed down the capital stack as Berkshire and 3G issue $14.1 billion of new high-yield bank loans that will be more senior than the existing bonds, Moody’s said. Further, as sister service Thomson Reuters Loan Pricing Corp. has reported, those new loans will be covenant-lite, further degrading the protections for those bondholders.
Other provisions of the Heinz bonds are unlikely to offer holders much help, Moody’s said. For instance, in addition to lacking change-of-control provisions, these bonds also have very limited protection through liens covenants. As a result, Heinz would be able to pledge up to 92 percent of its assets as security for other debt, meaning a deep subordination of the existing bonds.
Heinz also poses what Moody’s called “going dark” risk. As a public company now, the company files regular financial reports for shareholders, and bondholders get access to the same information. But once Heinz goes private, those quarterly reports are likely to cease, so bondholders will potentially no longer have as much access to information about the company’s ongoing financial performance, which in turn will make it increasingly difficult for investors to evaluate the riskiness of those bonds in the future, said Alexander Dill, a vice president and senior covenant officer at Moody’s.
“There is an inherent conflict between shareholders and creditors. This is a perfect example of that,” Dill told Buyouts.
The three tranches of bonds in question carry coupon rates of 6.25 percent or higher, Moody’s reported. So the possibility exists that the sponsors could decide for economic reasons to retire the existing debt in a refinancing.
On the other hand, a different recent food deal—the buyout of Hostess Brands’ snack cake brands by Apollo Global Management LLC and C. Dean Metropoulos & Co.—involves a $500 million term loan priced at 550 basis points above Libor with a 1.25 percent Libor floor, LCD reported. With interest rates now at historic lows, the floating-rate loan would represent more interest rate risk than the existing bonds with their fixed coupons.
Heinz declined comment on the Moody’s report. Berkshire and 3G could not be reached.