Who wouldn't love to have their company bought by Warren Buffett? Heinz creditors, that's who.
The cost of insuring Heinz bonds against default more than doubled after the ketchup and beans maker got a takeover offer from Mr. Buffett's Berkshire Hathaway and private equity firm 3G.
According to tracking firm Markit, the credit default swap spread on Heinz spiked by 116 basis points to 160 basis points. That's far past the record for Heinz, and much worse than the spread on Berkshire Hathaway, Markit noted.
The reason is 3G, which is putting up half the money and borrowing much of it. As Markit noted, Heinz's balance sheet was strong, but it's going to be levered up. In fact, it's probably the strong balance sheet that drew the buying interest.
The upshot: event risk is surging back in credit markets. You might buy a corporate bond, or some other credit product, because you like a balance sheet's strength, only to find that a buyout shop swoops in, levers it up and maybe even subordinates you.
Let's hope everyone who has suddenly poured into credit market in the past year is reading indentures and thinking about such issues. Of course they are.
(Boyd Erman is a Globe and Mail Capital Markets Reporter & Streetwise Columnist.)
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