TEXT-Fitch upgrades Burger King's IDR to 'B'
(The following statement was released by the rating agency)
Oct 12 - Fitch Ratings has upgraded the ratings of Burger King Worldwide, Inc.
(Burger King) and its related entities. Fitch has also assigned a 'BB/RR1' rating to the company's new secured credit facility.
Fitch has upgraded the following ratings:
Burger King Worldwide, Inc. (Parent Holding Co.) --Long-term Issuer Default Rating (IDR) to 'B' from '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 to 'B' from 'B-'; --$579.1 million face value of 11% sr. discount notes due 2019 to 'CCC+/RR6' from 'CCC-/RR6'.
Burger King Holdings, Inc. (Direct Parent of Burger King Corporation) --Long-term IDR to 'B' from 'B-'.
Burger King Corporation (Operating Company) --Long-term IDR to 'B' from 'B-'; --$794.5 million 9.875% senior unsecured notes due 2018 to 'B/RR4' from 'CCC+/RR5'.
The following new ratings have been assigned:
Burger King Corporation (Operating Company) --$130 million secured revolver due 2015 'BB/RR1'; --$1,030 million secured term loan A due 2017 'BB/RR1'; --$705 million secured term loan B due 2019 'BB/RR1'.
Fitch has simultaneously withdrawn the following ratings:
Burger King Corporation (Operating Company) --$150 million secured revolver due 2015 'BB-/RR1'; --$1,480.7 million secured term loan due 2016 'BB-/RR1'; --$235.1 million secured Euro tranche term loan due 2016 'BB-/RR1'.
At June 30, 2012, Burger King had $3.1 billion of total debt.
The Rating Outlook is Positive.
The upgrade of Burger King's ratings is due to the company's declining financial leverage, improving same-store sales (SSS) performance, and good cash flow generation. Burger King's cash flow and margins are benefiting from general and administrative (G&A) expense savings, significant refranchising, global SSS growth, and international new unit development by franchisees. Cash flow from operations (CFO), which totaled $343 million for the latest 12-month (LTM) period ended June 30, 2012, more than satisfies Burger King's decreasing capital expenditure requirements resulting in meaningful annual free cash flow (FCF).
Burger King's consolidated EBITDA margin has expanded to over 27% for the LTM period ended June 30, 2012 from more than 25% at Dec. 31, 2011. At June 30, 2012, 94% of Burger King's 12,604 units were franchised, an increase from 90% at Dec. 31, 2011. Burger King is succeeding with its goal of being a fully franchised business. Fitch expects Burger King's EBITDA margin to experience considerable additional expansion as a result of the financial effect of refranchising.
The Positive Outlook reflects Fitch's belief that Burger King's leverage will continue to decline over the next 12 months from a combination of modest EBITDA growth and moderate debt reduction. Coverage ratios should also improve as a result of the firm's September 2012 credit facility refinancing discussed below. Burger King is required to utilize a percentage of its excess cash flow (as defined by the firm's credit agreement and as discussed below) for the repayment of term loans.
Recent Same-Store Sales Improvement and Credit Metrics:
Burger King's global SSS grew 4.5% during the first six months of 2012, after declining 2.5% for the same period last year. Comparable sales growth in North America - which represented 67% of revenue and 66% of operating income excluding corporate expenses during 2011 - was 4.3% during the first half of 2012 versus a decline of 5.6% during the same period last year. Burger King has enhanced the quality of its food and is broadening its appeal to a wider demographic with an expanded line of premium burgers, smoothies, chicken strips, and salads. Fitch believes good systemwide operational execution and continued remodeling of units will enable Burger King to continue to generate positive SSS. Burger King has reported improving guest satisfaction scores and, as of June 30, 2012, franchisees had completed or have committed to re-image about 30% of its 7,469 units in North America.
For the LTM period ended June 30, 2012, rent-adjusted leverage (defined as total debt plus 8x gross rents-to-operating EBITDA plus gross rent) was 5.5x. Leverage is down from nearly 7.0x following the October 2010 leveraged buy-out by 3G Capital Partners, Ltd. Operating EBITDAR-to-interest expense plus gross rent was 2.1x, funds from operations (FFO) fixed-charge coverage was 2.0x, and FCF was $262.6 million for the LTM period. Fitch believes Burger King's FCF has the potential to approximate $200 million or more in most years, as a highly franchised model is less capital intensive and the firm does not pay a regular common dividend.
Refinancing of Secured Credit Facility:
On Sept. 28, 2012, Burger King entered into a new secured credit facility consisting of a $130 million revolver expiring Oct. 19, 2015, a $1,030 million tranche A term loan due Sept. 28, 2017, and a $705 million tranche B term loan due Sept. 28, 2019. Proceeds were used to refinance the firm's existing secured credit facility. As a result of the refinancing, Burger King lowered borrowing rates and extended the maturity dates of its term loans which were due in 2016 under the old agreement. Burger King expects to achieve annual cash interest savings of $25 million from the recent refinancing of its secured credit facility.
The 'RR1' Recovery Rating on Burger King's secured debt reflects Fitch's belief that recovery prospects on these obligations would remain outstanding at 91%-100% if the firm were to file for bankruptcy protection or restructure its balance sheet. Conversely, the 'B/RR4' rating on Burger King's 9.875% 2018 notes is due to Fitch's view that recovery would be average or in the 31%-50% range in a distressed situation.
The 'CCC+/RR6' rating on Burger King Capital Holdings, LLC's and Burger King Capital Finance, Inc.'s 11% discount notes due 2019 implies recovery prospects of 10% or less in a distressed situation. These notes are structurally subordinated to debt issued by Burger King Corporation because they are not guaranteed and were not issued by the operating company which holds the vast majority of the firm's $5.4 billion of assets at June 30, 2012.
Liquidity and Maturities:
Burger King has consistently maintained good liquidity. At June 30, 2012, the firm had $377.7 million of cash and $138.5 million of revolver availability net of letters of credit. Liquidity is supported by the firm's FCF, which Fitch believes can average at least $200 million annually as mentioned previously. Maturities are manageable in the intermediate term and consist mainly of term loan amortization payments through 2018. Beginning Dec. 31, 2012, Burger King's new term loan A amortizes quarterly at a rate of $6.4 million, stepping up to $12.9 million on Dec. 31, 2013, $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 new term loan B amortizes in quarterly installments equal to 0.25% of original principal with the balance due at maturity.
Burger King's new credit agreement subjects the firm to maximum total leverage, not adjusted for leases, and minimum interest coverage financial maintenance covenants. Maximum leverage is 6.25x beginning Dec. 31, 2012, stepping down to 6.0x March 31, 2013 through June 30, 2013, 5.75x Sept. 30, 2013 through March 31, 2014, 5.25x June 30, 2014 through June 30, 2015, and 5.0x thereafter. Minimum interest coverage is 1.7x beginning Dec. 31, 2012 until June 30, 2013, increasing to 2.0x after June 30, 2015. Burger King should maintain ample cushion under these covenants as current metrics are well within these parameters.
Following the end of the fiscal quarter ending Dec. 31, 2012 and thereafter, Burger King is required to use 50% of its annual excess cash flow (as defined by the agreement) for term loan repayment if total leverage is greater than 4.5x. The requirement declines to 25% if total leverage is less than 4.5x but greater than 3.5x, or 0% if total leverage is less than 3.5x. Fitch estimates that total leverage, which as defined by the company's new credit facility is based on total debt of the borrower and restricted subsidiaries less up to $450 million of cash, was about 3.6x at June 30, 2012.
What Could Trigger A Rating Action
Future developments that may, individually or collectively, lead to a positive rating action include:
--Material additional deleveraging; such that total adjusted debt-to-operating EBITDAR approximates 5.0x or lower, along with continued good FCF could result in an upgrade of Burger King's ratings; --Sustainably strong SSS performance, particularly in North America, and stable to improving EBITDA margins would be required for additional upgrades.
Future developments that may, individually or collectively, lead to a negative rating action include:
--A downgrade in the near term is not anticipated given Burger King's improved leverage profile, good liquidity, and lack of near-term maturities; --However, a meaningful increase in leverage, due to increased debt or a prolonged period of SSS declines, increased covenant risk, and negligible FCF, could result in a downgrade.
Additional information is available at '
'. The ratings above were unsolicited and have been provided by Fitch as a service to investors. Applicable Criteria and Related Research: --'Corporate Rating Methodology' (Aug. 8, 2012); --'Recovery Ratings and Notching Criteria for Nonfinancial Corporate Issuers' (Aug. 14, 2012); --'High-Yield Food, Beverage, Restaurant and Consumer Product Handbook - An Examination of Credit Risks and Opportunities' (Sept. 19, 2012); --'2012 Outlook: U.S. Restaurants; Credit Risk Is Chiefly Contained as Sales Will Grow but Food Costs Remain Elevated' (Dec. 7, 2011). Applicable Criteria and Related Research: Corporate Rating Methodology 2012 Outlook: U.S. Restaurants High-Yield Food, Beverage, Restaurant, and Consumer Products Handbook Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers (New York Ratings Team)