CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the following ratings of the H.J. Heinz Company (Heinz) and its related entities as follows.
Hawk Acquisition Holding Corp. (Parent)
--Long-term Issuer Default Rating (IDR) at 'BB-'.
H.J. Heinz Co. (Heinz)
--Long-term IDR at 'BB-';
--1st lien secured credit facilities at 'BB+';
--2nd lien secured notes at 'BB';
--Senior unsecured notes at 'BB-'.
H.J. Heinz Finance Co.
--Long-term IDR at 'BB-';
--Senior unsecured notes at 'BB-'.
H.J. Heinz Finance UK Plc.
--Long-term IDR at 'BB-';
--2nd lien secured notes at 'BB'.
The Rating Outlook is Stable.
KEY RATING DRIVERS:
Highly Leveraged after Buyout: The ratings balance Heinz's highly leveraged capital structure after its $28.75 billion buyout by Berkshire Hathaway Inc. (Berkshire) and 3G Special Situations Fund III, L.P. (3G Capital) on June 7, 2013, with its relatively low business risk as a global packaged food company. Fitch estimates Heinz's leverage (operating EBITDA/total debt with equity credit) was almost 9 times (x) for calendar 2013, which is very high for the current rating. However, Fitch expects leverage to decline to near 7x by the end of 2015 with significant EBITDA growth and moderate pay down on the company's $18.7 billion in debt (including Fitch's 50% equity credit for $8 billion preferred stock, see details below).
Strong Owner/Operators: The ratings incorporate significant qualitative benefits from the company's owners both for their financial strength and operating track records. 3G Capital has a proven ability to increase operating profitability substantially and rapidly deleverage acquired firms such as Burger King Worldwide, Inc. (Fitch IDR 'B+') and Anheuser Busch InBev NV/SA (Fitch IDR 'A'). Fitch believes 3G Capital can achieve similar results at Heinz in terms of margin expansion and deleveraging. 3G Capital and Berkshire each appointed three board members, including Warren Buffett and Jorge Paulo Lemann. These positive factors are slightly offset by potential short-term disruption from substantial management overhaul and restructuring after the transaction closed.
Preferred Stock Provides Flexibility: Integrated into the ratings is Fitch's treatment of the $8 billion 9% cumulative perpetual preferred stock (preferred) held by Berkshire. Fitch classifies 50% of the principal as equity and 50% as debt. Heinz assigns the preferred stock 100% equity credit which equates to approximately 7.0x gross leverage for the calendar year ended Dec. 31, 2013. Fitch views the flexibility to defer the $720 million annual dividend as part of its rationale for assigning 50% equity credit and a lever to pull should there be unanticipated deterioration in cash flow and/or liquidity concerns. However, the preferred dividends are cumulative. Heinz has the ability to call the preferreds after three years from issuance.
Growing FCF: Fitch estimates that FCF (after the preferred dividend and capital expenditures) was negative for the 2013 calendar year due to significant merger restructuring, and other nonrecurring cash charges. FCF should become positive in 2014 and improve over the next several years as one-time charges substantially dissipate by 2015 and EBITDA grows at least by a mid-single digit percentage annually as cost savings ramp up above initial targets. Fitch anticipates that Heinz can generate approximately $500 million combined FCF over the next two years and accelerating FCF thereafter. Fitch also estimates that top line organic growth will improve from recent very low single digit levels, as emerging markets exposure expands and more than offsets sluggishness in developed markets.
Substantial Size and Global Diversification: The ratings incorporate Heinz's product and geographic diversification, as well as its leading market share positions in major product categories. Ketchup and sauces represented 47% of fiscal 2013 sales while meals and snacks represented 37%, infant nutrition represented 10% and other products comprised the remaining 6%. Heinz generates two-thirds of its sales outside the U.S., with emerging markets making up nearly 25% of the firm's approximately $11.4 billion annual revenue. Top line weakness in North America, particularly in frozen nutritional meals, and in parts of Europe, remain a concern for Fitch.
Liquidity, Maturities, Covenants, and Collateral:
Ample Liquidity: Liquidity and on-going financial flexibility are expected to remain adequate despite a considerable increase in leverage as a result of the buyout. Liquidity totals $4.5 billion, including Heinz's $2 billion undrawn revolver and $2.5 billion in cash and cash equivalents at Dec. 31, 2013. Fitch believes Heinz is likely to maintain its high liquidity.
Modest Near-Term Maturities: Maturities are modest through 2018, primarily consisting of term loan amortizations of $95 million annually. The term loan agreement has an excess cash flow payment requirement, likely to be 50% in the near term based on leverage, but may decline to 25% upon improvement in that metric. Excess cash flow payments should lead to higher debt reduction as cash flow grows. Term loans totaling $9.5 billion and $3.1 billion notes from acquisition financing, as noted above, are due in 2019 and 2020. There is also approximately $2.2 billion of outstanding debt from prior to the transaction, primarily long dated maturities of 2028 or beyond. This legacy debt is senior unsecured except for GPB125 million notes due in 2030 at H.J. Finance UK Plc that became 2nd lien secured at the transaction closing.
Collateral and Covenant: Heinz's debt has one financial covenant, which is only tested if more than $50 million is drawn on the revolver at quarter end. This first lien net leverage ratio nets out up to $2 billion cash. Fitch estimates approximately 30% covenant cushion will be available in 2014. The first-priority debt is secured by a perfected first-priority security interest in substantially all tangible and intangible property with carve-outs that include Principal Property as defined by indentures governing rollover notes. Based on Fitch's interpretation this includes the gross book value of certain manufacturing, processing plants or warehouses located in the U.S. Fitch views the value of the collateral as meaningful as it is substantially based on the value of Heinz's trademarks, which include namesake Heinz, Ore-Ida, and Smart Ones. Collateral for junior-lien debt includes a second-priority security interest in assets securing the first-priority debt.
RATING SENSITIVITIES:
Upgrade Not Anticipated: An upgrade of Heinz's ratings is not anticipated in the near term. However, realization of cost savings, faster-than-anticipated deleveraging, accelerated top-line growth and growing FCF would be viewed positively, making upward migration of the ratings possible in the intermediate term.
Downgrade on Lack of Deleveraging: A negative rating action could occur if deleveraging is materially slower than Fitch expects such that Fitch would anticipate total debt with equity credit (50% equity credit for preferred stock) to operating EBITDA will be materially above 7.5x at the end of 2014 and accelerating deleveraging is not likely. Weak organic top line growth or declines, lack of significant margin expansion, or increased debt levels could trigger adverse rating actions. The inability to generate FCF or sustained loss of market share in core product categories would also be viewed negatively.
Additional Information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (August 2013);
--'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis' (December 2013);
--'Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers' (November 2013);
--'Fitch Adjusts or Withdraws Ratings on Certain Heinz Debt Upon Deal Closing' (June 2013);
--'Fitch: Heinz's Ratings Unaffected by Change in Buyout Funding; Outlook Stable' (March 2013);
--'Fitch Downgrades Heinz to 'BB-' & Rates Proposed Debt; Outlook Stable' (March 2013);
--'Fitch Downgrades Heinz to 'BB+' on Buyout Announcement; Places Ratings on Negative Watch' (February 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis ￢ﾀﾓ Effective Dec. 15, 2011 to Dec. 13, 2012
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=656516
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=721836
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=823353
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