Ambitious dealmaking can spell pain for corporate bond investors.
Unilever’s bondholders were offered a reminder of that on Friday as prices for the Anglo-Dutch consumer group’s debt fell after the company rejected a $143bn takeover approach from US rival Kraft Heinz.
Bonds that were sold only last week by Unilever dropped, with half the €1.2bn issue sliding 2 per cent to 98.37 cents on the euro, leaving them poised to settle below par for the first time since their sale.
Older Unilever bonds did not escape either, as investors anticipated that billions more of debt will be needed to finance the deal if it happens. A €700m bond fell from 102 cents on the euro to as low as 97 cents.
Although Unilever rejected Kraft Heinz’s approach, the decline in the bonds underlines the sharp effect mergers and acquisitions can have for corporate debt markets that have swelled in size during the era of easy money in the US. The corporate bond markets were also rattled after the announcement of AT&T’s bid for Time Warner and 21st Century Fox’s pursuit of Sky.
“There is the initial uncertainty so the natural tendency is for spreads to widen on news of an acquisition, particularly if the acquiring company is going to be taking on more debt or if the acquiring company is more lowly rated than the target company,” said Lisa Coleman, head of global investment grade corporate credit at JPMorgan Asset Management.
Kraft Heinz’s credit rating is five notches lower than Unilever’s, which investors say is likely to leave a shadow over Unilever’s bonds until the outcome of the proposed acquisition is clear. The US company said on Friday that it looked forward to reaching “agreement on the terms of a transaction”.
“I doubt they will fully recover because there is still some uncertainty about whether Heinz is going to approach again,” said Mitch Reznick, co-head of credit at Hermes Investment Management. “The reality is from Heinz’s point of view, Unilever’s balance sheet has the capacity for more debt leverage,” he added.
Ernesto Bisagno, a vice-president at rating agency Moody’s, added that the Kraft Heinz offer would be “credit negative for Unilever’s bondholders”, pointing to an increase in leverage from Unilever’s currently “moderate” levels.