Fitch affirms Burger King's IDR at B+, upgrades its senior notes to BB-/RR3; outlook stable

Nevin Barich

CHICAGO , February 19, 2014 (press release) – Fitch Ratings has taken several rating actions on Burger King Worldwide, Inc. (Burger King; NYSE: BKW) and related entities.

Fitch has affirmed the following ratings:

Burger King Worldwide, Inc. (Parent Holding Co.)

--Long-term Issuer Default Rating (IDR) at '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 at 'B+';

--11% sr. discount notes due 2019 at 'B-/RR6'.

Burger King Holdings, Inc. (Direct Parent of Burger King Corporation)

--Long-term IDR at 'B+'.

Burger King Corporation (Operating Company)

--Long-term IDR at 'B+';

--Secured revolver due 2015 at 'BB+/RR1';

--Secured term loan A due 2017 at 'BB+/RR1';

--Secured term loan B due 2019 at 'BB+/RR1'.

Fitch has simultaneously upgraded the following rating:

Burger King Corporation (Operating Company)

--9.875% senior unsecured notes due 2018 to 'BB-/RR3' from 'B+/RR4'.

The Rating Outlook is revised to Stable from Positive due to Fitch's belief that there could be potential changes in Burger King's capital structure, which results in higher leverage, within the next 12 - 18 months.

At Dec. 31, 2013, Burger King had approximately $3 billion of total debt.

Key Rating Drivers

Upgrade and Recovery Analysis

The upgrade of Burger King Corp.'s 9.875% sr. unsecured notes due Oct. 15, 2018 to 'BB-/RR3' from 'B+/RR4' reflects the firm's 'B+' IDR and Fitch's view that recovery for senior unsecured note holders has improved and would be good at between 51% - 70% in a distressed situation. The 9.875% notes are guaranteed by Burger King Holdings and material domestic wholly-owned subsidiaries of Burger King Corp.

Fitch's recovery analysis is based on assumptions related to Burger King's enterprise value as a going concern and potential outstanding claims. The analysis considers Burger King's essentially 100% franchised business model and the stability of its cash flows while factoring in historical information regarding distressed restaurant companies.

Fitch continues to view recovery on Burger King's secured debt as outstanding and rates these obligations 'BB+/RR1'. The secured debt is collateralized by a perfected first-priority interest in substantially all of Burger King's and each guarantor's assets. Conversely, the 'B-/RR6' rating on Burger King's 11% discount notes reflects Fitch's belief that recovery for these bondholders would be poor at 0% - 10% in a distressed situation. The discount notes were issued at the intermediate holding company level and are not guaranteed.

Strong Cash Flow Generation

Burger King's cash flow is supported by the high-margin royalty, property, and fee income associated with its fully franchised business model and the firm's significantly reduced general and administrative (G&A) cost structure. Furthermore, the company's FCF is enhanced by lower capital expenditures given that franchisees fund remodeling and new unit development.

Burger King is gradually returning more cash to shareholders but the firm's dividend remains manageable at $0.07 per share quarterly and 35% of 2013 net income on an annualized basis. Fitch projects that Burger King will generate approximately $1 billion of revenue, $700 million of EBITDA, $350 million of cash flow from operations, and $200 million of FCF in fiscal 2014. Growth is expected to be driven by low single-digit same-store sales (SSS) growth, 4% - 5% net restaurant growth (NRG), and controlled general and administrative expenses. More than 90% of Burger King's annual corporate revenue is projected to be from its franchise and property operations post the completion of the firm's global refranchising initiative in October 2013.

Leverage and Capital Structure

Fitch projects that total adjusted debt-to-operating EBITDAR will approximate 4.9x in 2014, reflecting approximately $3 billion of total debt and mid-single digit revenue and EBITDA growth. Burger King's lease-adjusted leverage (based on 8x gross rent) has declined from nearly 7.0x since the firm was acquired by 3G Capital Partners, Ltd. in October 2010 due to reduced G&A, improvement in SSS and NRG.

Burger King has expressed a level of comfort with its leverage, which was 3.4x on a net debt-to-EBITDA basis at Dec. 31, 2013. The firm plans to evaluate its capital structure as it approaches the first call date on its 9.875% notes in October 2014 and its 11% discount notes in April 2015. Fitch would re-evaluate Burger King's ratings if there are changes in the firm's capital structure.

Same-Store Sales Trends

During 2013, Burger King's global system-wide SSS increased 0.5%. SSS declined 0.9% in North America, increased 2.4% in Europe, the Middle East, and Africa (EMEA), was relatively flat in Latin America and the Caribbean (LAC) at 0.1%, and rose 4.1% in the Asia Pacific (APAC) region. SSS in North America was affected by soft consumer spending, heightened competition, and difficult comparisons following the one-year anniversary of the largest menu launch in the firm's history. In April of 2012, Burger King rolled out a new salad, wrap, smoothie, and dessert platform.

Fitch expects SSS growth in 2014 to be supported by successful implementation of Burger King's Four Pillar strategy in North America, which focuses on menu, marketing, image, and operations, and effective promotions systemwide. For example, Burger King is planning fewer more impactful promotions like its new lower calorie and fat French fries referred to as Satisfries in 2014. At Dec. 31, 2013, 55% of Burger King's 13,667 restaurants were in North America, 25% were in EMEA, 11% were in LAC, and 9% were in the APAC region.

North America Remodeling and International Expansion

Burger King's business strategy includes remodeling units in North America and international expansion, in addition to the global refranchising initiative and the Four Pillar Plan discussed above. Burger King is on track to meet its target of having 40% of its restaurants in North America, which totaled 7,436 at Dec. 31, 2013, remodeled by 2015 and has stated that reimaged units experience an average sales lift of about 10% -15%.

Franchisees opened 670 new international restaurants, representing NRG of 5.2%, during 2013. Continued NRG growth will be enabled by foreign development and joint venture agreements entered into over the 2011 - 2013 period. Focus areas of expansion include high-growth emerging markets; such as Brazil, China, and Russia.

Liquidity and Maturities

Burger King has consistently maintained good liquidity. At Dec. 31, 2013, the firm had $787 million of cash and an undrawn $130 million revolving credit facility expiring Oct. 19, 2015. Liquidity is supported by the firm's FCF, which Fitch projects can average $200 million annually.

Maturities are manageable in the intermediate term and consist mainly of term loan amortization payments through 2018. Burger King's term loan A amortizes at a rate of $12.9 million per quarter beginning Dec. 31, 2013, stepping up to $19.3 million on Dec. 31, 2014, $25.8 million on Dec. 31, 2015, and $32.2 million on Dec. 31, 2016 with the balance payable at maturity. The term loan B amortizes in quarterly installments equal to 0.25% of original principal with the balance due at maturity.

Financial Covenants

Burger King's credit agreement subjects the firm to maximum total leverage, not adjusted for leases, and minimum interest coverage financial maintenance covenants. Maximum leverage, excluding the firm's 11% discount notes and up to $450 million of cash, is 5.75x Sept. 30, 2013 through March 31, 2014, 5.25x June 30, 2014 to June 30, 2015, and 5.0x thereafter. Minimum interest coverage is 1.8x until June 30, 2014, 1.9x Sept. 30, 2014 to June 30, 2015, and 2.0x thereafter. Fitch believes that Burger King can maintain roughly 40% EBITDA cushion under its maximum leverage coverage over the near-to-intermediate term.

RATING SENSITIVITIES

--Changes to Burger King's capital structure or sustained increases or decreases in EBITDA could result in upgrades or downgrades to the firm's issue-level ratings due to Fitch's recovery analysis.

Future developments that may, individually or collectively, lead to an upgrade of Burger King's IDR include:

--Material additional deleveraging such that total adjusted debt-to-operating EBITDAR is maintained below the 4.5x range, along with continued strong FCF could result in an upgrade in Burger King's IDR;

--Good SSS performance, particularly in North America, would be required for additional upgrades.

Future developments that may, individually or collectively, lead to a downgrade of Burger King's IDR include:

--Total adjusted debt-to-operating EBITDAR sustained above 6.0x, due to increased debt and/or a prolonged period of SSS declines and a significant decline in EBITDA, and considerably lower FCF could result in a downgrade of Burger King's IDR.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology; Including Short-Term Ratings and Parent and Subsidiary Linkage' (August 2013);

--'Rating Restaurant Companies - Sector Credit Factors' (February 2014);

--'U.S. Restaurant Sector Credit Factor Compendium' (February 2014);

--'2014 Outlook: U.S. Restaurants (Shareholder Demands to Rise, Even as Market Share Battle and Cost Pressures Continue)' (December 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

Rating Restaurant Companies (Sector Credit Factors)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=729716

U.S. Restaurant Sector Credit Factor Compendium

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=734840

2014 Outlook: U.S. Restaurants (Shareholder Demands to Rise, Even as Market Share Battle and Cost Pressures Continue)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724335

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