Kraft Heinz exposes the problem of US corporate debt

"His balance sheet has exploded," wrote JPMorgan Chase analyst Ken Goldman in a report released late last week.

Goldman noted that Kraft Heinz's profits are "flat", that revenues have "decreased" and that the balance sheet is "in debt".

"This is not an ideal progression of financial measures," wrote Goldman.

Not to mention the SEC's investigation into Kraft Heinz's books, leaked by the company.

Record of debt in the United States

Kraft Heinz's debt problem reminds us once again of the importance of Corporate America's debt over a decade of extremely low interest rates.

Kraft Heinz has long-term debt of $ 30.9 billion, up from $ 28.3 billion a year ago. This equates to a significant leverage multiple of 4.4 times the company's adjusted earnings for 2018.

The balance sheet could be even more tense this year. Kraft Heinz predicted earnings for 2019 would fall sharply to about $ 6.4 billion. This would raise its leverage level to an extremely high multiple of 4.8.

Kraft Heinz returns with drastic cost reduction

The Kraft Heinz disaster shows how over-indebtedness can be problematic when the strategy of a management team fails.

Years of cost reduction finally came back to haunt Kraft Heinz.

The company announced last week a $ 15 billion reduction in the value of the brands Kraft and Oscar Mayer.

"The high priority given to cost reduction and improved margins is at the expense of the long-term health of the company," said Erin Lash, an analyst at Morningstar.

Lash said that "excessive leverage" has long been a problem at Kraft Heinz.

She pointed out that Heinz's leverage had reached 4.8 times earnings at the end of 2014 as a result of the takeover of 3G Capital.

Kraft, on the other hand, had a healthy leverage ratio of only 2.8 times the projected earnings at that time. The companies merged next year.

Acceleration of balance sheet cleaning

The good news is that Kraft Heinz is taking important steps to clean up its balance sheet.

And Kraft Heinz has announced its intention to do the same with the money raised through the additional asset sales contemplated by the company.

The dividend cut will allow Kraft Heinz to save more than $ 1 billion a year – cash that can also be used to strengthen the balance sheet.

However, Christopher Growe, an analyst at Stifel, told his clients that it would do "nothing" to reduce the company's high debt ratio.

Kraft Heinz said his goal was to reduce the debt ratio to three times the profits.

Goldman of JPMorgan warned that Kraft Heinz would not generate enough money to achieve this goal for "several years".

Even assuming that Kraft Heinz is paying nearly $ 3 billion in debt over the next two years, the company's debt will only be reduced to 4.1 times earnings by the end of 2020, JPMorgan said.

This could leave Kraft Heinz little money to invest in its declining brands.

Declassification of the credit rating?

Last week, S & P's global ratings put Kraft Heinz in the spotlight to revise its rating down over the next two years. The company's credit rating, BBB, is only two notches above the order.

Kraft Heinz would be downgraded "if the business continues to weaken", if its credit ratios do not improve or if the ongoing SEC investigation reveals new problems, S & P said.

"Obviously, they have to deleverage, no question," said Jerry Phelan, an analyst at S & P, CNN Business.

Although Kraft Heinz executives have promised to clean up the balance sheet, their comments also suggest that the debt problem could return.

Managing Director Bernardo Hees said the faster deleveraging strategy was to give the company "more punch" in order to prepare it for "future consolidation".

In other words, Kraft Heinz wants to quickly mobilize its resources to finance further acquisitions. Perhaps he has not learned the painful lesson about the pitfalls of excessive debt.