Kraft/Heinz combo to replace leveraged loans with I-grade debt

By Michelle Sierra and Jonathan Schwarzberg

NEW YORK (Reuters) - Kraft Foods Group Inc (KRFT.O) and H.J. Heinz Co plan to refinance $9.5 billion (6.38 billion pounds) of existing high yield debt in the investment grade market following the combination of the two companies announced Wednesday, according to a company presentation.

The merger of cheese manufacturer Kraft and ketchup maker Heinz, a company owned by 3G Capital and Warren Buffett's Berkshire Hathaway Inc, is anticipated being completed in the second half of the year.

The combined company's revenue is expected to be $28 billion. Berkshire Hathaway and Brazilian private equity firm 3G Capital are together paying a $10 billion dividend to Kraft shareholders, both companies said in a joint statement.

The repayments will start with Heinz's leveraged loans. Heinz originally used $9.5 billion in loans to back its buyout by 3G Capital and Berkshire Hathaway in March 2013. The facilities include a $2.95 billion term loan B-1 and a $6.55 billion term loan B-2, according to Thomson Reuters LPC data. JP Morgan and Wells Fargo led that deal.

Agent bank JP Morgan announced to investors Wednesday morning that both the Heinz term loans will be repaid at the transaction's close, sources listening to the call said.

Heinz will also refinance its $3.1 billion of 4.25 percent second-lien notes due in 2020, according to sources. The bonds also backed the Heinz 2013 acquisition.

The company has a total of $5.1 billion of second-lien notes outstanding after issuing $2 billion of 4.875 percent notes due 2025 in January, according to regulatory filings.

3G Capital said on an investor call Wednesday morning that roughly $2 billion of second-lien notes will stay in place.

On the leveraged side, Heinz also has a $2 billion revolver.

The Heinz B1/B2 loans were trading at 100.125-100.375 early Wednesday. Unlike the Heinz bonds, which soared 20 points after the announcement of the transaction, the leveraged loans did not trade higher because they are expected to be replaced with investment grade debt. The company's $437 million of 6.75 percent notes due in 2032 were bid at 127, while the $931 million of 7.125 percent 2039s were bid at 135, according to IFR.

The existing loans will get repaid at par, but investors will still receive interest until the loans are repaid.

On the investment grade side, Kraft arranged a $3 billion, five-year senior unsecured revolver on May 29, 2014, with a $1 billion accordion, according to Kraft's annual report. The revolver was undrawn as of December 27, 2014.

Sources expect the two revolvers to be combined into one. To absorb the Kraft debt, the buyer will need an amendment.

As part of the combination, Kraft said in a Wednesday investor presentation it will also refinance $8 billion of preferred equity as soon as it is callable in June 2016 and replace it with new investment grade debt.

Kraft is also targeting $2 billion of debt pay-down within two years and a target net leverage of below 3.0 times in the medium-term. Fitch Ratings said it anticipates pro forma leverage at the combined company to be in the mid-4.0 times range. The ratings agency said leverage at Heinz is currently at 6.2 times.

As of December 27, Kraft had $8.63 billion of long-term debt that consisted primarily of senior unsecured notes, according to the company's annual report filed on February 19.

(Editing By Lynn Adler and Jon Methven)