Weak Oil and Falling Industrial Metal Prices, Along With New Buyout Rumors, Weaken Credit Markets
New issue market subdued; JPMorgan's issue attractive whereas Ecolab looked expensive.
Corporate credit spreads continued to widen last week as the average spread of the Morningstar Corporate Index rose another 8 basis point to +151, its widest level since mid-2013. While the energy sector widened another 11 basis points to +264, helping to pull the index wider, the basic industries sector was the worst-performing sector last week. Basic industries widened 15 basis points, and within the sector, the metals and mining subsector caused most of the damage, widening 23 basis points. Last week, we had opined that oil prices had found a near-term bottom, and subsequently, oil held in the mid- to upper $40s range, which helped to rein in the decline in the energy sector. Among the commodities markets, it was industrial metals that sank last week. For example, copper opened the week at $2.72 per pound, and in one of its worst one-day losses, fell as low as $2.42 before rebounding higher on Friday and ending the week at $2.62.
Typically, in an environment where credit risk is rising, a defensive sector such as consumer products will hold its value better than more cyclical sectors. However, consumer products widened 9 basis points last week as a result of several buyout rumors. Kraft Foods' (KRFT) (rating: BBB+, narrow moat) bonds reportedly widened 30-50 points on speculation that it could be the next target of 3G Capital. 3G Capital and Berkshire Hathaway teamed up in 2013 to purchase Heinz in a debt-funded transaction and have been rumored to be on the hunt for additional acquisitions. We think 3G was attracted to Heinz because of the combination of the company's strong brands and high proportion of international and emerging-market sales. The rationale behind this recent rumor is that 3G could integrate Kraft's strong brands, which are mainly domestically sold, into Heinz's international distribution chain and use Heinz's strength to negotiate for shelf space in international markets. ConAgra CAG (rating: BBB-, narrow moat) was also subject to rumors that it may also be the target of either private equity buyers or shareholder activists. It appears that the rumors for both of these companies began to surface after both had publicly confirmed that they would not present at the Consumer Analyst Group of New York annual conference in mid-February.
David Sekera does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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