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A limit to Kraft’s sweet tooth

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Cadbury’s swift rejection of Kraft’s $16.7 billion offer has set off widespread speculation that Kraft will bump up its bid to ensure that it becomes king of candy land.

There is a limit, however, to how much Kraft can pay if it is committed to its investment-grade ratings. The company’s ratings sit two to four notches above speculative, or junk, territory, and every dollop of extra debt to pay for the acquisition would pressure the company’s ratings, making this and future financing much more expensive.

During the last merger and acquisition boom, ratings often became secondary for many firms, since the difference in the cost of financing for investment-grade companies and junk-rated companies had narrowed.

The credit crisis and the re-pricing of risk, however, mean the consequences of losing a sterling credit rating is much greater.

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