Although asset prices generally traded higher across most global markets last week, the investment-grade corporate bond market lagged behind. The average spread of the Morningstar Corporate Bond Index (our proxy for the investment-grade corporate bond market) was unchanged at +128. While most of the sectors underlying the investment-grade bond index tightened, that tightening was offset by idiosyncratic issues among several issuers that not only caused those companies' bonds to widen out but also drove credit spreads wider for other issuers in the same sector. For example, The Kraft Heinz Co. (BBB-, positive) announced a trifecta of negative issues: plunging profitability, asset write-downs, and a Securities and Exchange Commission investigation into its accounting.
Kraft's profitability experienced significant erosion in the fourth quarter as its adjusted operating margin fell 440 basis points. Inflation across manufacturing and transportation expenses rose faster than the company could pass though price increases. In addition, the company wrote down the value of its brand portfolio by $15 billion as consumer demand has shifted away from its iconic brands. Finally, Kraft announced that it is undergoing an SEC investigation related to its procurement accounting. Kraft's longer-dated bonds immediately widened out approximately 45 basis points in early trading before regaining some of the loss, ending the week about 30 basis points wider. Corporate bonds widened out across the entire consumer product sector as investors became concerned that the same type of margin pressure and asset write-downs could cause the credit profiles of similar companies to weaken as well.