Kraft, Berkshire raise $17.5 bln for acquisitions

By Dena Aubin

NEW YORK, Feb 4 (BestGrowthStock) – Food giant Kraft Foods and
Warren Buffett’s Berkshire Hathaway sold $17.5 billion in debt
on Thursday, braving a suddenly weak corporate bond market to
finance major acquisitions, market sources said.

Kraft’s (KFT.N: ) $9.5 billion debt offering was the
sixth-largest U.S. corporate bond sale on record, according to
Thomson Reuters data. Proceeds will help finance Kraft’s $18.5
billion acquisition of British chocolatier Cadbury (CBRY.L: ).

Berkshire Hathaway (BRKa.N: ) (BRKb.N: ) sold $8 billion of
debt to help pay for its $26 billion acquisition of railroad
operator Burlington Northern Santa Fe Corp (BNI.N: ). That bond
deal is the 11th largest U.S. corporate bond sale ever.

The two bond deals ran the gamut of credit quality in the
investment-grade arena, with Berkshire Hathaway’s ratings close
to the highest and Kraft just steps above junk status.

With Berkshire, “you’re buying something that’s very, very
safe and when you lock in that return you know what you’re
going to get at the end of the period,” said William Larkin,
portfolio manager at Cabot Money Management in Salem
Massachusetts. “Its model is basically a portfolio of other
businesses, so it’s a diversification play.”

KRAFT SWEETENS YIELDS

Kraft is also a diversification play, given that it is the
No. 2 food business in the world with exposure to developed and
emerging markets, Larkin said. However, Kraft is adding a good
deal of debt with the Cadbury acquisition and its rating could
be downgraded, he said.

While demand has been strong for corporate bonds, concerns
about mounting sovereign risk and tumbling stocks put a damper
on the credit market on Thursday.

Kraft, which announced pricing of its deal on Wednesday,
raised the yield spreads on Thursday after the corporate bond
market sold off.

“I think they had to pay up a little bit to do the (large)
size, and the market’s weakness just added to it,” said Bob
Bishop, portfolio manager at SCM Advisors in San Francisco.

For example, Kraft raised the yield spreads on its 10-year
notes by about 5 basis points to 190 basis points over
Treasuries. By comparison, its outstanding debt with a 2018
maturity was yielding about 140 basis points over Treasuries
earlier this week. For details on other tranches click on
[ID:nN04231534].

The Dow Jones industrial average fell 2 percent as
escalating sovereign debt problems in Europe and a surprise
rise in U.S. jobless claims sparked concerns about the global
economy. For details click on [ID:nN04194705].

BERKSHIRE HIT WITH DOWNGRADE

Berkshire sold mostly short-term debt, including two-year
fixed-rate notes at 65 basis points over Treasuries, three-year
fixed-rate notes at 85 basis points over Treasuries and
five-year fixed-rate notes at 95 basis points over Treasuries.
For details on other tranches click on [ID:nN04249088].

Berkshire also faced headwinds, losing its last top AAA on
Thursday as Standard & Poor’s downgraded it one notch to
AA-plus. S&P said the cost of the Burlington acquisition would
reduce Berkshire’s historically strong capital adequacy and
liquidity.

“A key concern is that Berkshire’s risk tolerances appear
to have increased, yet we believe they remain ill-defined while
the organization increases in complexity,” S&P said.

Moody’s Investors Service cut Berkshire to Aa2 in April,
its third-highest rating, while Fitch in March cut Berkshire’s
senior unsecured rating to AA, its third-highest rating.

Even after the market’s weakness on Thursday, yields on
corporate bonds remained close to five-year lows, keeping
borrowing costs down, and demand has been strong. For example,
Kraft’s bond sale had attracted about $23 billion in demand as
of early Thursday, according to IFR, a Thomson Reuters
service.

On average, corporate bonds now yield about 4.6 percent,
down from a record high of 9.3 percent in October 2008, at the
height of the global credit crisis.

“Given the market liquidity problems that happened a year
or so ago, firms are more interested in locking in funding for
a deal rather than waiting till a later moment,” said Guy
LeBas, chief fixed-income strategist at Janney Montgomery Scott
in Philadelphia.

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(Editing by Chizu Nomiyama)

Kraft, Berkshire raise $17.5 bln for acquisitions