Moody's affirms Kraft Heinz's Baa3/Prime-3 ratings; outlook revised to positive

Istanbul, May 22 (DHA) - Moody's Investors Service ("Moody's") has affirmed the Baa2 senior secured debt rating, Baa3 senior unsecured debt rating and Prime -3 commercial paper rating of Kraft Heinz Foods Company and affiliates ("Kraft Heinz"). Moody's also revised the rating outlook to positive from stable.
The positive outlook reflects the successful completion of major integration activities related to the 2015 merger of H.J. Heinz Company and Kraft Foods that formed North America's third largest food company.
The integration included achieving $1.7 billion of cost savings through zero-based budgeting (ZBB), which exceeded the company's original budget of $1.5 billion. This has produced a dramatic increase in operating profit margins from about 12 percent pro forma 2014 to over 27 percent currently, which is more than 10 percentage points better than the company's package food company peers.
Kraft Heinz also has retired $2 billion of its debt since the 2015 merger, reducing debt/EBITDA from about 5.2 times to now slightly above 4.0 times.
However, if Kraft Heinz is able to remain on track to achieve its near-term goals -- which include increasing sales, EBITDA and EBITDA margin in 2018 -- debt/EBITDA should fall sustainably below 4.0 times by the end of the year, which could lead to a rating upgrade.
Moody's expects that free cash flow available for debt reduction will improve significantly this year, reflecting sharply lower cash outlays for restructuring activities and related cost savings, and a significant reduction in cash taxes related the recent US tax overhaul.
However, Moody's believes that a portion of the incremental free cash flow generated is likely to be reinvested in internal and external growth initiatives, including possible major acquisitions. As a result, Moody's assumes that further reduction in financial leverage will likely come from earnings growth rather than debt repayment.
Aggressive financial policy is an important aspect of Kraft Heinz's credit profile -- especially with regard to its acquisition strategy. Acquisition event risk is partly mitigated by the company's stated commitment to maintain an investment grade rating profile.
Other financial policy related factors that weigh on Kraft Heinz's ratings include a high dividend payout ratio in excess of 75 percent, inadequate liquidity facilities to support a large global commercial paper program, and aggressive working capital financing strategies. Improvement in these areas, most of which are within the company's control, would materially enhance the company's overall credit profile.