Kraft Heinz, owner of Oscar Mayer, Velveeta and Planter's nuts, is now scrambling to collect cash that can be used to pay off their nearly $ 31 billion of long-term debt.
"The balance has a balloon," said JP Goldman analyst Ken Goldman in a report late last week.
Goldman noted that Kraft Heinz's profits are "flat", revenues have "shrunk" and the balance is "levered."
"This is not an ideal progression of financial calculations," Goldman wrote.
And that's not to mention the SEC study in Kraft Heinz's books that the company revealed.
Corporate Debt Debt Levels
Kraft Heinz Debt Problems serve as another reminder of the large amount of debt that Corporate America has taken in a decade of extremely low interest rates.
Kraft Heinz sits on $ 30.9 billion of long-term debt, up from $ 28.3 billion a year ago. It makes a significant impact on more than 4.4 times the company's 2018 adjusted earnings.
The balance can come under even greater strain this year. Power Heinz estimated that revenues in 2019 will fall sharply to around $ 6.4 billion. It would lift its lever level to the uncomfortably high figure of 4.8.
Deep cost savings come back to haunting Kraft Heinz
The Kraft Heinz disaster demonstrates how it can be problematic to get tons of debt when a management park strategy fails.
Years of cutting costs to the leg have finally come back to haunt Kraft Heinz.
The company announced last week, writing down the value of Kraft and the Oscar Mayer brands with $ 15 billion.
"Overwhelming emphasis on taking out costs and improving margins has come at the expense of the company's long-term health," said Erin Lash, a Morningstar analyst.
Lash said that "excessive leverage" has long been a problem with Kraft Heinz.
She noted that Heinz's influence shot up to 4.8 times earnings at the end of 2014 following the acquisition of 3G Capital.
Kraft, on the other hand, had a healthy leverage ratio of just 2.8 times the expected earnings at that time. The companies merged next year.
Clears up the balance cleans up
The good news is that Kraft Heinz takes significant steps to address the balance.
And Kraft Heinz said it is planning to do the same with the money concerned with additional assets selling the company contemplating for the time being.
The dividend savings will save Kraft Heinz more than $ 1 billion a year – cash that can also be used to balance the balance.
Stifel analyst Christopher Growe told clients that this would "do little" to reduce the company's high leverage.
Kraft Heinz said the goal is to reduce the proceeds to just three times earnings.
JPMorgan's Goldman warns that Kraft Heinz will not generate enough money to hit the target of "many years".
Although assuming Kraft Heinz pays down nearly $ 3 billion of debt over the next two years, the company's influence will only come down to 4.1 times earnings by the end of 2020, JPMorgan said.
It could leave Kraft Heinz with little money to invest in his staggering marks.
Credit rating downgrade
Last week, S & P Global Ratings sets Kraft Heinz on notice of downgrade over the next two years. The company's BBB credit rating is just two notches above garbage.
Kraft Heinz would be downgraded "if the business continues to fall", if the credit score does not improve, or if the ongoing SEC survey reveals additional problems, said S & P. 19659004] "It is clear that they must live "There's no doubt about that," says S & P analyst Jerry Phelan CNN Business.
While Kraft Heinz executives promised to clean up the balance, their comments also indicate that the debt problem could come back.
CEO Bernardo Hees said the faster sharing strategy is aimed at giving the company "more firepower" to position it for "future consolidation."
In other words, Kraft Heinz will quickly buckle back to pay for more acquisitions. Maybe it didn't teach the painful lesson here about the pitfalls of excess debt.