S&P Global Ratings has downgraded Campbell Soup Co.’s credit rating from BBB to BBB-. This places the company one notch above speculative-grade, or junk, status. The downgrade follows Campbell Soup’s announcement of a $2.7 billion all-cash deal for Sovos Brands, the parent company of Rao’s pasta sauces and noosa yogurts. The company plans to finance this deal by issuing new debt.
According to S&P Global Ratings, the adjusted pro forma debt leverage is expected to increase to approximately 4x at close, compared to 2.8x for the 12 months ending April 30, 2023. The agency does not anticipate the company restoring leverage to the low-3x area until fiscal 2026.
Campbell Soup currently has around $4.7 billion of debt, as reported by FactSet.
The accompanying chart, provided by BondCliQ Media Services, shows that following the downgrade, there were only sellers of the bonds.
S&P Global Ratings predicts that Campbell Soup will face weaker free operating cash flow (FOCF) over the next two years due to higher interest costs and increased capital expenditures. This situation will leave the company with less cash available for discretionary debt reduction.
Campbell Soup’s Financial Outlook
The rating agency recently expressed concerns about Campbell Soup’s financial outlook. According to their estimation, the company’s interest expense will increase significantly due to new debt, and the company also plans to increase capital expenditures through capacity expansion projects over the next three years. As a result, the agency anticipates a decrease in free operating cash flow compared to historical levels.
However, despite these challenges, S&P is confident that Campbell Soup’s priority will be to restore its financial profile rather than focus on shareholder returns or debt-financed deals. The company has stated its intention to prioritize debt reduction in the next two years and has limited its share buyback program. These measures aim to bring leverage closer to 3 times within three years.
Moreover, the agency believes that the deal with Rao’s will benefit Campbell Soup’s portfolio. Acquiring Rao’s will secure Campbell’s leading market position in the ultra-distinctive Italian sauces category, which is a significant differentiation from their mainstream Prego brand. This addition of Rao’s as a sizable brand could also help mitigate demand fluctuations in their soup products.
As for the stock performance, Campbell Soup’s shares experienced a 1.1% decline on Monday and have fallen by 21% year-to-date. In contrast, the S&P 500 index has seen a 17% gain.