Should Investors Fear ConAgra's Debt Load?

Investors are rightfully wary of companies that take on too much debt. After all, even well-run businesses can be brought to their knees under the weight of heavy debt loads. Companies that take on a lot of debt put themselves in danger, and that's especially true now considering the environment we're in.

Interest rates are still near historic lows, but it's unlikely rates will stay this low. After all, interest rates can't remain at rock-bottom levels forever. When interest rates do rise, it could make life much more difficult for companies with bloated balance sheets. For ConAgra Foods (NYSE: CAG  ) , debt is a real concern. It's taken on a lot of debt over the past few years, which will place a great strain on its cash flow going forward if it needs to refinance its debt. Considering that ConAgra is in the midst of a major restructuring effort, that's not an unrealistic scenario.

Here's why ConAgra investors have reason to be concerned about the company's financial position.

Did ConAgra bite off more than it can chew?
ConAgra's debt load has expanded considerably in just a few years. At the end of its most recent fiscal year, the company held more than $8.6 billion in senior long-term debt. That's up from $2.6 billion at the end of fiscal 2012. Keep in mind that the $8.6 billion figure doesn't include additional debt that the company classifies differently. In addition to that, ConAgra has $2.6 billion in what it terms "other non-current liabilities." This compares to just $5.3 billion in stockholder's equity.

Specifically, ConAgra issued $1.5 billion under its term loan facility that matures in 2018. The interest rate used is calculated by LIBOR, an international equivalent to the Fed funds rate, plus 1.75%. In addition, ConAgra issued $750 million in unsecured notes that mature at the end of 2016. It was fortunate to issue the 2016 notes at an attractive yield of 1.3%.

Given the structural problems facing ConAgra, it's not unreasonable for the company to need to continue drawing from its loan facilities to finance its major ongoing restructuring. When these notes mature, however, it will have a difficult time doing so at attractive pricing, assuming rates keep steadily increasing. That seems likely given the Fed's consistent tapering.

ConAgra's balance sheet is in worse condition than other players in the food industry. For example, Sysco (NYSE: SYY  ) holds $2.9 billion in debt but $5.2 billion in shareholder equity. This provides it a much more comfortable long-term debt-to-equity ratio of 55% compared to ConAgra's ratio, which is 160%.

One of the reasons for ConAgra's debt increase is its ambitious acquisition campaign. ConAgra acquired Ralcorp Holdings last year for $5 billion, which it hoped would boost sales in its private-label brands. Unfortunately, the acquisition isn't working out as ConAgra had hoped. Due to higher-than-expected costs, ConAgra's private-brands segment posted a $573 million loss last quarter due to impairment charges.

Watch out for rising interest rates
ConAgra went on an ambitious spending spree to expand its business into new categories, such as private-label brands. This has resulted in a bloated balance sheet with a lot of debt on the books. While this isn't problematic yet, it might be once interest rates begin to rise. That will make it difficult for ConAgra to refinance its debt at attractive levels.

ConAgra has incurred significant debt over the past year. If ConAgra needs to refinance this debt, it may incur significantly higher interest rates if interest rates rise and ConAgra's financial position suffers further.

ConAgra's troubles are enhanced by the fact that its major acquisition isn't working out as it had planned. Sales in private-label brands soared, but significantly higher costs are resulting in losses, and unplanned writedowns are cause for concern. That's making the acquisition seem far less beneficial than the company likely hoped. As a result, investors need to keep an eye on ConAgra's balance sheet.

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10/23/2014 10:28 AM
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