Income Opportunities

Press Release Source: Fitch Ratings on Friday October 15, 2010, 1:08 pm EDT

CHICAGO–(BUSINESS WIRE)– In conjunction with the expiration of 3G Capital’s tender offer described below, Fitch Ratings has taken various rating actions on Burger King Holdings, Inc. (Burger King; NYSE:BKC) and its wholly-owned operating subsidiary Burger King Corporation.

Fitch has downgraded the following:

Burger King Corporation–Long-term Issuer Default Rating (IDR) to ‘B’ from ‘B+’.

Fitch has assigned the following ratings:

Burger King Holdings, Inc.–Long-term IDR ‘B’;–$150 million secured revolving facility ‘BB-/RR2′;–$1.850 billion secured term loan facility ‘BB-/RR2′;–$800 million senior unsecured notes ‘CCC/RR6′.

Fitch has also withdrawn its ‘BB+/RR1′ rating on Burger King Corporation’s secured bank facility which is being repaid as a result of the buy-out.

The Rating Outlook is Stable.

as previously mentioned, these actions follow the completion of 3G Capital’s tender offer for all the outstanding shares of Burger King’s stock at $24/share or $3.3 billion and resolves the Negative Rating Watch Fitch placed on Burger King’s ratings on Sept. 2, 2010. Fitch downgraded Burger King Corporation’s IDR to ‘B+’ from ‘BB’ on Sept. 2, 2010 following the company’s definitive agreement to be acquired by 3G Capital in a transaction valued at approximately $4.1 billion, including the assumption of roughly $800 million of debt and capital leases. 3G is providing roughly $1.5 billion of equity capital and Burger King will have approximately $2.7 billion of debt when the transaction closes later this month. Financing to fund the buyout includes a $1.85 billion six-year term loan, a portion of its new $150 million five-year revolver and $800 million of 9.875% senior unsecured notes due Oct. 15, 2018. The debt was issued by merger subsidiary – Blue Acquisition Sub, Inc. – but upon consummation of the transaction, Burger King will assume all of the obligations.

The new secured bank facility subjects the company to various financial covenants, including a maximum leverage ratio, a minimum interest coverage ratio and a leverage-based maximum yearly capital expenditure restriction. Terms also include mandatory prepayments with a percentage of excess free cash flow as defined by the agreement. The bank debt is secured on a first priority basis by a perfected security interest in all tangible and intangible assets of Burger King Corporation and is guaranteed by Burger King Holdings and all material wholly-owned domestic subsidiaries of Burger King Corporation. The $800 million of 9.875% senior unsecured notes are also guaranteed by Burger King Holdings, Inc. and all domestic subsidiaries and contain a change of control put option.

The ratings reflect Burger King’s high financial leverage, its positive free cash flow (FCF- defined as cash flow from operations less capital expenditures and dividends) and its competitive market position in the global quick-service restaurant industry. Total adjusted debt-to-operating EBITDAR (defined as total debt plus eight times gross rent expense-to-earnings before interest, taxes, depreciation, amortization and gross rents) pro forma for the leveraged buyout is approximately 6.5x, up from 3.5x at June 30, 2010. Since fiscal 2007, Burger King’s FCF has grown at a 13% compound annual growth rate to $126 million in fiscal 2010 as operating income growth has been complemented by recent reductions in capital expenditures. although same-store sales (SSS) performance weakened and the company has lost market share over the past two years, Burger King remains the third largest sandwich chain in the U.S. according to Nation’s Restaurant New’s Annual top 100 ranking with approximately 10% market share, 12,174 units worldwide and roughly $15 billion of systemwide sales.

The ‘RR2′ Recovery Rating on Burger King’s $1.850 billion of secured debt indicates that Fitch views recovery prospects on these obligations as superior at 71%-90%. while not anticipated, the ‘RR6′ rating assigned to Burger King’s senior unsecured notes reflects Fitch’s opinion that recovery prospects would be below 10% if the bonds went into default. Fitch’s recovery analysis is based on the assumption that the company’s going concern enterprise value in a distressed situation would be approximately $1.7 billion or about 60% below the $4.1 billion value of the recent buyout.

At June 30, 2010, 38% of Burger King’s 12,174 restaurants were located outside of the North America and 89% were franchised while 11% were company operated. new management plans to refranchise half of the 1,339 company operated units over the next three to five years and to focus on international expansion. Fitch expects these efforts to be accretive to margins since franchised stores generate a higher margin and food-away-from-home expenditures are growing faster outside the U.S. However, Fitch is also mindful of risks associated with a highly franchised system, such as engaging in long-term contracts with franchisees that are not effective operators and the franchisor having less influence over the overall direction of the brand.

3G plans to reduce capital expenditures from $150 million in fiscal 2010 to maintenance levels or approximately $22 million beginning in fiscal 2011. The combination of significantly reduced capital expenditures and an acceleration of refranchising should significantly increase consolidated margins and FCF in the near-to-intermediate term. as such, Fitch projects that Burger King can generate free cash flow in excess of $200 million in fiscal 2011 and 2012 and maintain adequate liquidity, despite higher interest costs. Given 3G’s history of reducing both cost and financial leverage for companies that it has acquired, adjusted leverage could fall to the mid-5.0x level within the next 24 months if this discretionary cash is used for debt repayment versus cash payouts and the operations don’t deteriorate.

Fitch views management’s plan to refranchise nearly 700 company operated restaurants over the next five years as aggressive but recognizes that the environment for these transactions is improving due to greater access to capital. if management is unable to execute its operating strategy, Burger King continues to lose market share, financial policies are more aggressive than Fitch anticipates and adjusted leverage consistently remains materially above pro forma levels, ratings will be reviewed for a downgrade.

Fitch remains concerned about the need for Burger King to broaden its appeal to a wider array of consumers by refreshing its restaurants, its marketing and its food offerings. Since the inception of the company’s re-imaging program two and a half years ago, the company has only remodeled 170 or about 13% of its company units. Fitch views the company’s barbell menu of value and premium food items and focus on enhanced breakfast offerings, such as the breakfast platters, Seattle’s Best coffee and mini blueberry biscuits, as steps in the right direction. However, a lack of investment into the brand and continued high levels of unemployment among Burger King’s core customer demographic, which skews younger and more male, could cause the company’s SSS to continue to lag competitors.

Additional information is available at fitchratings.com. The issuer did not participate in the rating process other than through the medium of its public disclosure.

Additional sources used by Fitch include Nation’s Restaurant News, one of the leading trade magazines devoted to the restaurant industry, and Technomic, a well recognized research and consulting firm dedicated to the foodservice industry.

Applicable Criteria and Related Research:

–’Corporate Rating Methodology’ (Aug. 16, 2010);–’High Yield Food, Beverage, and Restaurants: Cross-Company Liquidity, Debt and Covenant Analysis’ (July 26, 2010);–’Credit Analysis: Burger King Corporation’ (Dec. 21, 2009).

Applicable Criteria and Related Research:Corporate Rating Methodologyfitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646High Yield Food, Beverage, and Restaurants: Cross-Company Liquidity, Debt and Covenant Analysisfitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=540829Credit Analysis: Burger King Corporationfitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=492468

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Written by Tim on October 15, 2010 under Affiliate Marketing Course.

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