CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned issuer and expected issue level ratings related to Burger King Worldwide, Inc.'s (Burger King; NYSE: BKW) proposed acquisition of Tim Hortons, Inc. (Tim Hortons; NYSE: THI). The debt is being issued by 1011778 B.C. Unlimited Liability Company (NewCo) - a new legal entity created to effect the transaction. Ratings, which are based on Fitch's expectations regarding final terms and conditions, are as follows:
NewCo (Canadian borrower and U.S. co-borrower)
--Long-term Issuer Default Rating (IDR) 'B'/Outlook Stable;
--Senior secured revolver 'BB/RR1';
--Senior secured term loan B 'BB/RR1';
--Senior secured 2nd lien notes 'B/RR4'.
Fitch maintains the Rating Watch Negative on Burger King and its subsidiaries. The ratings were placed on Negative Watch on Aug. 27, 2014 following the firm's definitive agreement to acquire Tim Hortons. Resolution of the Negative Watch will occur upon transaction closing or more certainty regarding the amount and timing of repayment of Burger King's existing debt. A list of Burger King's current ratings is at the end of this release.
KEY RATING DRIVERS
High Pro forma Debt, Gross Leverage
Pro forma debt is expected to include the proposed $6.725 billion seven-year senior secured term loan B, $2.25 billion of 7.5-year 2nd lien senior secured notes, and roughly $200 million of capital leases. Approximately $4 billion of existing debt at Burger King and Tim Hortons is expected to be repaid, although the timing and ultimate amounts remain uncertain. Pro forma total adjusted debt-to-EBITDAR exceeds 7.0x, excluding synergies. Fitch has also classified $3 billion of 9% preferred stock contributed by Berkshire Hathaway as 50% debt/50% equity due to debt-like characteristics.
Collateral for the guaranteed senior secured facility, which includes a $500 million five-year revolver and the above mentioned term loan, includes a first-priority lien on substantially all property of the borrower and guarantors. Financial covenants are limited to a springing maintenance covenant of 6.5x net first lien leverage if the revolver is 30% drawn. The term loan amortizes at 1% of principal annually. The guaranteed 2nd lien notes are secured by a second-priority interest in the collateral securing the credit facilities. The notes contain make-whole, equity clawback and change of control provisions.
Ratings reflect Fitch's views regarding the deleveraging and the free cash flow (FCF) generating ability of the new combined company, the stability of its operating cash flow, and on-going liquidity. Fitch believes total adjusted debt-to-EBITDAR can approach 6.0x within two years of transaction closing and that annual FCF (defined as cash flow from operations less capital expenditures and dividends) will exceed $300 million excluding any one-time costs.
Deleveraging should be enabled by EBITDA growth, given net restaurant expansion and positive same-store sales, and modest debt reduction. Ratings consider potential synergies, the ability of the Tim Hortons brand to succeed outside of its core Canadian market, and the currency mismatch related to the firm's U.S. denominated obligations and non-U.S. cash flows.
Liquidity will be supported by the company's $500 million revolver and a meaningful cash balance which is expected to exceed $300 million on a pro forma June 30, 2014 basis. Fitch expects future cash balances to depend on FCF generation and the firm's financial strategy related to cash flow usage. Moreover, partnership exchangeable units issued as part of the transaction's structure may be exchanged, at the discretion of the parent holding company, for cash or common shares of the new publicly traded Holding company after the one-year anniversary of the merger. This potential cash outflow could be a drain on liquidity or lead to higher debt levels.
Recovery Analysis
The expected 'BB/RR1' rating on the proposed senior secured credit facility reflects Fitch's view that recovery would be outstanding at 91%-100% even in a distressed situation. The 'B/RR4' rating on the 2nd lien notes corresponds to average potential recovery in the 31%-50% range. Ratings incorporate Fitch's opinion regarding the new company's enterprise value as a going concern and the mix of 1st lien and 2nd lien debt in the new company's capital structure.
Ratings on Burger King's existing debt are expected to be withdrawn. However, should any of the firm's senior unsecured $795 million 9.87% 2018 notes or $478 million 11% 2019 discount notes remain outstanding respective ratings will be downgraded multiple notches due to significant subordination and the probability of 0% recovery in a distressed situation. Fitch would assign new ratings to any of Tim Hortons' privately placed notes that remain outstanding. Tim Hortons' debt includes three series of privately placed senior unsecured notes with change of control provisions that require the borrower to make an offer to repurchase the notes.
Strategically Sound Combination
Fitch views the combination of Burger King and Tim Hortons as strategically sound. The combined entity will benefit from increased scale, the diversification provided by two nearly 100% franchised quick-service restaurant brands, and multiple levers for future growth. However, the new company will have considerable financial leverage and, as mentioned previously, successful meaningful expansion of the Tim Hortons' brand outside of Canada is uncertain given the highly competitive global restaurant industry.
RATING SENSITIVITIES
Future developments that may, individually or collectively, lead to an upgrade of the new company's IDR include:
--An upgrade is not likely in the near term. However, an upgrade would be considered if total adjusted debt-to-EBITDAR is sustained below 6.0x, annual FCF consistently exceeds $300 million, and SSS remain positive.
Future developments that may, individually or collectively, lead to a downgrade in the new company's IDR include:
--A downgrade below 'B' is not anticipated given the stability of cash flows and adequate expected liquidity. However, slower than expected deleveraging, negative SSS, or declining FCF would result in a deterioration of credit quality and would be reflected in the ratings.
The following ratings of Burger King and its subsidiaries are maintained on Rating Watch Negative:
Burger King Worldwide, Inc. (Parent Holding Co.)
--Long-term IDR 'B+'.
Burger King Capital Holdings, LLC (BKCH/Parent of Burger King Holdings, Inc.) and Burger King Capital Finance, Inc. (BKCF/Financing Subsidiary) as Co-Issuers
--Long-term IDR 'B+';
--11% senior discount notes due 2019 'B-/RR6'.
Burger King Holdings, Inc. (Direct Parent of Burger King Corporation)
--Long-term IDR 'B+'.
Burger King Corporation (Operating Company)
--Long-term IDR 'B+';
--Secured revolver due 2015 'BB+/RR1';
--Secured term loan A due 2017 'BB+/RR1';
--Secured term loan B due 2019 'BB+/RR1';
--9.875% senior unsecured notes due 2018 'BB-/RR3'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 2014);
--'Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis' (December 2013);
--'Parent and Subsidiary Rating Linkage' (August 2013);
--'Fitch Places Burger King's Ratings on Negative Watch Due to Acquisition' (August 2014).
Applicable Criteria and Related Research:
Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=726863
Parent and Subsidiary Rating Linkage Fitch's Approach to Rating Entities within a Corporate Group Structure
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=714476
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=876395
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