Our views

Kraft Heinz bid for Unilever – is no target too big?


Guy Cornelius, Credit Product Specialist

21 February 2017

The $143bn bid for Unilever by Kraft Heinz has quite rightly taken most of the headlines – it would have been the second largest corporate takeover in history (behind Vodafone’s $172bn takeover of Mannesmann in 2000). Despite the news over the weekend of a very fast end to proceedings it serves as a very timely reminder to be prepared for an increase in negative event risk over the next few months as corporates look to take advantage of historically very low interest rates to help fund acquisitions before an expected rise in US rates (RLAM expects three separate increases in US rates this year to 1.5%.).
So how do we best position & prepare for this? At the longer duration area of the market we have consistently positioned our portfolios to take an overweight stance in secured bonds believing that the market has undervalued the covenants & structure that secured asset backed bonds provide. This stance is increasingly important should we see a rise in aggressive leveraged bids for investment grade corporates since the protection secured bonds offer make them far less volatile. And by building in the right kind of pre-emptive protections, it is actually possible to turn traditionally negative events for creditors, such as M&A, into a very positive outcome. Heavily covenanted bonds often place unhelpful constraints on the acquiring companies, heralding the potential for bond redemption at above market prices.
As an example from last week’s situation some Unilever bonds (Unilever 1.125% 2028) widened as much as 28 bps following the news of KHC’s bid for Unilever— representing 2.5% in price terms.
RLAM’s credit team does invest in good quality unsecured corporate bonds but generally prefers to take that exposure in short duration bonds where price volatility is much reduced.

The $143bn bid for Unilever by Kraft Heinz has quite rightly taken most of the headlines – it would have been the second largest corporate takeover in history (behind Vodafone’s $172bn takeover of Mannesmann in 2000). Despite the news over the weekend of a very fast end to proceedings it serves as a very timely reminder to be prepared for an increase in negative event risk over the next few months as corporates look to take advantage of historically very low interest rates to help fund acquisitions before an expected rise in US rates (RLAM expects three separate increases in US rates this year to 1.5%).

So how do we best position and prepare for this? At the longer duration end of the market we have consistently positioned our portfolios to take an overweight stance in secured bonds, believing that the market has undervalued the covenants and structure that secured asset backed bonds provide. This stance is increasingly important should we see a rise in aggressive leveraged bids for investment grade corporates, since the protection secured bonds offer make them far less volatile. And by building in the right kind of pre-emptive protections, it is actually possible to turn traditionally negative events for creditors, such as mergers and acquisitions, into a very positive outcome. Heavily covenanted bonds often place unhelpful constraints on the acquiring companies, heralding the potential for bond redemption at above market prices.

As an example from last week’s situation some Unilever bonds (Unilever 1.125% 2028) widened as much as 28 bps following the news of KHC’s bid for Unilever — representing 2.5% in price terms.

RLAM’s credit team does invest in good quality unsecured corporate bonds but generally prefers to take that exposure in short duration bonds where price volatility is much reduced.

The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.