The possibility that activist investor Nelson Peltz may press for changes at Kraft Foods Inc will not necessarily be significantly harmful to the food maker's credit spreads, even if Kraft's debt load increases as part of a plan to increase its share price.
Peltz's Trian Fund Management LP has acquired a 3 percent stake in Kraft and wants the company to jettison unsuccessful brands and find better uses for its cash, a source familiar with the situation said on Thursday. Kraft, the maker of Oreo cookies, Jell-O and Oscar Mayer hot dogs, declined to comment. Trian could not be immediately reached for comment.
"While the additional risk to bondholders from Peltz' shareholder activism is incontrovertible at the onset, Kraft may be the rare example where a good shake-up could benefit all players in the longer run," CreditSights analyst James Goldstein said in a report.
Trian wants Kraft to sell its Post cereal and Maxwell House coffee brands according to media reports. The source, however, cautioned that it was too early to discuss which brands Kraft should divest.
"While it goes without saying that more aggressive shareholder rewards will be on the agenda - it remains to be seen how deeply Peltz expects Kraft to dig into bondholder pockets to fund his rewards," Goldstein said.
The cost to insure Kraft's debt with credit default swaps jumped around 10 basis points on the media reports to about 36 basis points, or $36,000 per year for five years to insure $10 million in debt. "In our opinion, Kraft 5-year CDS and cash bonds have already been pricing in some event risk, as we believe the market was anticipating the company would become more aggressive with its balance sheet through aggressive share repurchase activity and acquisitions," Bear Stearns analyst Frank Henson said in a report.
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