Jan. 21 (Bloomberg) — Kraft Foods Inc. bonds<\/a> are rallying as debt investors reject Warren Buffett\u2019s<\/a> assertion <\/a>that the company\u2019s 11.9 billion-pound ($19.3 billion) takeover of Cadbury Plc is a mistake. <\/p>\n Kraft\u2019s 6.875 percent notes due in 2039 climbed to a three- month high of 108.7 cents on the dollar yesterday, according to Trace data. The Northfield, Illinois-based food and beverage company\u2019s bonds have returned 2.02 percent including reinvested interest this month, compared with 1.72 percent for an index of similar debt and 1.71 percent for the global corporate bond market, according to Bank of America Merrill Lynch index data. <\/p>\n While Buffett said Kraft is overpaying for Cadbury by using undervalued stock to fund part of the deal, bond investors are betting the acquisition won\u2019t jeopardize its investment-grade credit rating. Shares of Kraft have risen 2 percent since early September, just before the offer was announced. <\/p>\n \u201cIt\u2019s not as bad on the bondholders as it is on the equity guys,\u201d said Mirko Mikelic<\/a>, a money manager at Fifth Third Asset Management in Grand Rapids, Michigan, where he helps oversee $14 billion of fixed-income assets. \u201cPeople in the bond market don\u2019t think they\u2019re going to want to jeopardize their BBB rating.\u201d <\/p>\n Elsewhere in credit markets, the extra yield investors demand to own corporate bonds globally instead of Treasuries is holding at about the lowest since December 2007 at 1.61 percentage points. Yields fell to 4.09 percent on average yesterday from 4.12 percent on Jan. 19. Credit-default swaps show investors are growing more concerned about the risk of companies failing to pay their debt. <\/p>\n Kraft Bonds Rise <\/p>\n Some Kraft bonds rose yesterday even after Fitch Ratings cut its default ranking to BBB- from BBB, citing the \u201cthe anticipated increase in financial leverage of the combined companies.\u201d Kraft, the maker of Oreo cookies and Tang powdered drinks, said the deal will result in at least $675 million in annual savings and give it leading positions in India, Brazil and Mexico. <\/p>\n Kraft\u2019s 6.875 percent bonds initially dropped after the Cadbury bid was first announced in September, falling to 107.2 cents on the dollar from a high of 114.9 cents, Trace data show. The spread, which widened to 204 basis points, narrowed to 167 basis points yesterday, the lowest since the deal was proposed. <\/p>\n \u201cIt\u2019s obviously a good company to a bond investor in the sense that it\u2019s a steady business,\u201d said Jason Brady<\/a>, a managing director at Santa Fe, New Mexico-based Thornburg Investment Management, which oversees about $55 billion, including Kraft bonds. \u201cWhen you start levering up to do transformative things, I think bond investors start to get kind of nervous.\u201d <\/p>\n Biggest Candy Maker <\/p>\n The takeover creates a company with about $50 billion in annual sales, displacing Mars Inc. as the world\u2019s biggest candy maker, according to Euromonitor data. Kraft fell 63 cents, or 2.1 percent, to $28.78 in New York Stock Exchange composite trading. <\/p>\n \u201cI think this deal was a mistake,\u201d Buffett said in a Bloomberg Television interview. \u201cKraft was very undervalued before. I feel it\u2019s less undervalued after doing this deal.\u201d <\/p>\n Kraft will likely keep its investment-grade ratings, Moody\u2019s Investors Service said. Bonds rated below Baa3 by Moody\u2019s and BBB- by Standard & Poor\u2019s and Fitch are considered below investment grade. The company will \u201cno doubt\u201d sell bonds in the U.S. and Europe to help finance the purchase, Gary Jenkins<\/a>, head of credit strategy at Evolution Securities Ltd. in London, said yesterday in a note to clients. <\/p>\n Credit-default swaps on the Markit CDX North America Investment-Grade Index Series 13, which is linked to 125 companies and used to speculate on creditworthiness or to hedge against losses, increased 0.5 basis point to 85 basis points yesterday, according to broker Phoenix Partners Group. A rise in the index signals a decline in investor confidence. <\/p>\n Vanguard Issue <\/p>\n Vanguard Health Systems Inc. plans to sell $1 billion of eight-year notes as soon as today to yield 8 percent to 8.25 percent, according to a person familiar with the offering, who declined to be identified because terms aren\u2019t set. <\/p>\n Swiss Re\u2019s<\/a> forecast for increasing sales of bonds that pay when catastrophes occur matches that of larger German rival Munich Re<\/a>, which earlier this month said issuance will climb to $5 billion in 2010 from about $3.5 billion last year. About $5 billion of notes expire this year, Swiss Re said. <\/p>\n Swiss Re, the lead manager on more than half the 2009 issues, said the market may almost triple over the next five years as demand for coverage increases and the securities replace some traditional reinsurance. <\/p>\n \u201cThe pipeline for new cat bonds is very active and the momentum of 2009 will surely continue,\u201d Martin Bisping<\/a>, head of non-life risk transformation at the Zurich-based reinsurer, said in an interview. \u201cWe expect the market to broaden.\u201d<\/p>\n Share Investor Links<\/span><\/a><\/a><\/p>\n Share Investor Blog<\/a> – Stockmarket & Business commentary Recommended Amazon Reading<\/span><\/p>\n
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