Betting Against Kraft, Campbell Bonds Pays Off as Amazon Lurks

May 10, 2018

Betting Against Kraft, Campbell Bonds Pays Off as Amazon Lurks
May 10th, 2018, 09:00 AM

By Maciej Onoszko

(Bloomberg) — Kraft Heinz Foods Co., Campbell Soup Co. and General Mills Inc. bondholders are caught between a rock and hard place.

Debt backed by branded packaged food companies are a perfect target for shorts as those businesses are getting squeezed by activist shareholders on one hand and on the other, said Randy Steuart, a partner at the Toronto-based hedge fund Ewing Morris & Co. Investment Partners Ltd. “These bonds may end up being the poster children of the market’s willingness to overlook the risks that come in spaces with deep secular challenges,” Steuart said. “The investment-grade bond market may be one of the most crowded asset classes in capital markets.”

The pressure from activists is detrimental for balance sheets at a time consumers are increasingly turning to non- branded food products that offer similar quality at a lower price than their labeled peers. Amazon can facilitate higher sales of the products given its enormous reach to shoppers. Steuart manages the Ewing Morris Flexible Fixed Income Fund LP, set up in February 2016. The fund entered the trades against packaged food companies in January, just as corporate spreads started widening globally to finish the first three months of 2018 with the first quarterly increase in two years.

Getting the timing right helped the fund return 2.4 percent between December and April, outperforming Canada’s corporate bond market index which fell 0.2 percent in the same period. The sell-off in investment-grade debt comes as interest rates are on the rise and some investors worry about the size of debt piles issuers have accumulated. There were more companies globally carrying debt loads in excess of five times a measure of earnings than in 2007, on the eve of the financial crisis, S&P Global Ratings estimated in February.

On top of that, more and more of that debt is rated just a few steps above junk. BBB-rated issuance accounted for 42 percent of total U.S. investment-grade corporate bond sales in 2017, Morgan Stanley said in a report, a record for as far back as the bank’s data go.

As companies have taken advantage of lower interest rates, a growing number of activist investors and shareholders are starting to push for businesses to boost share prices. They typically want the companies to buy back stock, raise dividends, use debt to finance M&A or put themselves up for sale.
“All of these maneuvers are bad for balance sheets, so there doesn’t look like any pretty way out of this for bondholders,” Steuart said. “Activism is a horrible thing for lenders.”

Making things worse for many retailers, Amazon is sending shockwaves across the industry as it continues to disrupt the way the business has traditionally worked.

“People buy private label food because in many cases there’s no discernible difference between branded and private label and the tiebreaker goes to the product with the lowest price,” Steuart said. “In ten years, I wouldn’t be shocked if Amazon was delivering food to my door with all private-label

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