By Matt Wirz
Investors dumped bonds of Kraft Heinz Co. Friday when Fitch Ratings and S&P Global Ratings pushed their ratings of the company into junk territory following a disappointing earnings report.
A downgrade by two of the three major ratings firms typically forces index operators to classify Kraft as below investment grade and prohibit many bond funds from holding the debt.
Kraft's bond due 2046 fell to about 90 cents on the dollar Friday from 96 cents Thursday and 101 cents before the earnings disclosure. About $4.5 billion of the company's bonds traded in the two days following the disclosure, according to data from MarketAxess. That figure represents about 20% of the company's $23 billion face amount of bonds outstanding, according to data from Bank of America Corp.
Fitch and S&P pointed to Kraft's commitment to keep paying shareholder dividends despite decreased earnings as a risk to bondholders.
"We believe it's important to Kraft Heinz shareholders to maintain our dividend during this time of transformation," said Michael Mullen, senior vice president of corporate affairs for Kraft. "We also remain committed to reducing leverage over time as we reposition the company for sustainable growth and returns."
Moody's Investors Service changed the outlook on its Kraft rating -- currently at the lowest rung of investment grade -- to "negative" from "stable" on Friday but didn't cut the rating.
The downgrades by Fitch and S&P will likely make Kraft the largest "fallen angel" to enter the junk-bond market since 2005, according to research by Bank of America. That change would make Kraft bonds account for 1.9% of a widely tracked high-yield bond index, the bank's analysts said.
The food maker's sales have fallen in recent years as consumers shift away from the processed products that make up its core brands toward fresher and healthier options.
"The company lost sight of investing to manage long-term trends facing the business, such as the overall shift toward healthier eating by Kraft Heinz consumers," said Abigail Ingalls, an analyst at Breckinridge Capital Advisors, which doesn't own Kraft bonds.
Treasury bonds rallied Friday after the release of a U.S. retail sales report that, while reasonably strong, was somewhat disappointing in its details, according to analysts. The 10-year bond yield, which falls when prices rise, climbed to 1.587% Friday from 1.616% Thursday, according to data from Tradeweb.
Sam Goldfarb contributed to this article.
Write to Matt Wirz at firstname.lastname@example.org