By Mariana Santibanez
NEW YORK, May 13 (IFR) - 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
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
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."
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
(Reporting by Mariana Santibanez; Editing by Natalie Harrison
and Marc Carnegie)