Kraft Heinz Co. could be hit with a junk credit rating by mid-2021 if it fails to turn itself around, S&P Global Ratings said Friday.
S&P said earnings for the maker of Kraft Macaroni & Cheese and Heinz ketchup have been weaker than it expected and the company is sending mixed messages on its expectations for performance later this year. The credit grader said the company needs to cut debt relative to earnings and that it is worried about the risks Kraft Heinz could face in the second half of 2019, including higher commodity costs and lower stocking at retailers.
Kraft Heinz carries BBB- or equivalent ratings -- the lowest investment-grade rank -- from all three major graders. With about $30.3 billion of long-term debt outstanding, the company is among the 20 largest issuers of debt in the lowest tier of investment-grade, excluding financial companies.
The amount of corporate debt rated between BBB+ and BBB- has ballooned in recent years, stoking fears from some investors that hundreds of billions of debt could fall to junk status if companies struggle. If Kraft Heinz were downgraded by at least two credit graders, it would fall into junk bond indexes, making it one the biggest issuers of high-yield debt. Speculative-grade ratings can make it more expensive for companies to fund daily business and harder to weather economic cycles. The Warren Buffett-backed company has said it’s committed to maintaining its investment-grade ratings.
Email and voicemail messages to Kraft Heinz seeking comment weren’t immediately returned.
Kraft Heinz is still trying to move past a myriad of issues that have hammered its shares this year. The company has struggled ever since its bid to buy Unilever collapsed in 2017, and in February, it announced a $15.4 billion writedown on the value of its brands and a subpoena. Its own internal investigations have also revealed accounting issues, and it had to restate results going back to 2015.
As the company tries to turn things around, it announced new leadership: Longtime Anheuser-Busch InBev executive Miguel Patricio replaced Bernardo Hees as chief executive officer this summer. But he has an uphill battle ahead: He said earlier this month that Kraft Heinz needs a “comprehensive strategy,” but that he didn’t have enough confidence to issue guidance at this time. The company also withdrew its previous Ebitda guidance for the year and investors sent the shares tumbling.
S&P said the company needs to reduce debt levels relative to earnings. It said the company could take steps like boosting income, selling assets, or reducing or eliminating its dividend.
Kraft Heinz shares fell as much as 1.8% to $25.15 in early trading. The stock had already lost 41% of its value this year through Thursday’s close. Its bonds were little changed Friday morning.