Market Overview

Fitch Upgrades Burger King's IDR to 'B+'; Outlook Positive


Fitch Ratings has upgraded the ratings of Burger King Worldwide, Inc. (Burger King) and its related entities as follows.

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';

--11% sr. discount notes due 2019 to 'B-/RR6' from 'CCC+/RR6'.

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

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

Burger King Corporation (Operating Company)

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

--Secured revolver due 2015 to 'BB+/RR1' from 'BB/RR1';

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

--Secured term loan B due 2019 to 'BB+/RR1' from 'BB/RR1';

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

At Dec. 31, 2012, Burger King had approximately $3 billion of total debt.

The Rating Outlook is Positive.

Rating Rationale:

The upgrade of Burger King's ratings is due to the firm's operating income growth, declining financial leverage, and improving brand image which should support positive future same-store sales (SSS) performance. Burger King is successfully executing its stated business strategy which includes improving its North American business, becoming nearly 100% franchised, and accelerating international expansion, mainly via franchisees or master franchisee joint ventures (JVs). Global net restaurant growth was 3.9% or a total of 485 restaurants during 2012.

Global SSS have been positive for six consecutive quarters and were 3.2% for the 2012 year, a stark improvement versus a decline of 0.5% during 2011. Burger King's expanded line of premium burgers, smoothies, chicken strips, and salads along with promotions such as the 55-cent anniversary WHOPPER celebration helped drive traffic during 2012.

Income from operations increased 15.2% to $418 million while EBITDA grew 11.5% to $652 million in 2012. Burger King's EBITDA margin of 33.2% for 2012, up from 25% in 2011, is benefiting from an accelerated pace of refranchising lower margin company-operated restaurants, reduced general and administrative expenses (G&A) and higher royalty income. Burger King was 97% franchised at Dec. 31, 2012 and expects to be nearly 100% franchised by the end of 2013.

For the year ended Dec. 31, 2012, total debt-to-operating EBITDA was 4.7x and total adjusted debt-to-operating EBITDAR was approximately 5.4x. Cash flow from operations totaled $224 million and FCF (cash flow from operations less capital expenditures and dividends) was $140 million.

Fitch projects that rent-adjusted leverage will fall below 5.0x in 2013 due mainly to EBITDA growth. Fitch also believes Burger King has the capacity to generate $150 million or more of FCF annually due to lower capital expenditure requirements once fully franchised. Fitch views this level of FCF as meaningful for a company with Burger King's revenue base and debt structure. Total revenue for 2012 was $2 billion and, as mentioned previously, total debt was $3 billion.

Positive Outlook:

The Positive Outlook is due to deleveraging expectations over the near-to-intermediate term, Fitch's view that Burger King's North America operations will continue to improve, and the fact that the company is laying a solid foundation for faster international growth. Operating EBITDA during 2013 will be supported by controlled management general and administrative expenses (G&A), same-store sales growth, and additional franchisee fees and royalties as units are developed. Burger King expects to spend $200 - $220 million annually on a go-forward basis on G&A overhead, is tweaking its barbell menu pricing strategy to increase its competitiveness during 2013, and sees further accelerated international net restaurant growth in 2013.

Term loan amortization, as discussed below, will result in only modest debt reduction over the near term. Burger King currently plans to refinance its higher coupon debt in the 2014/2015 time period. The firm's 9.875% notes due in 2018 and 11% discount notes due 2019 are subject to a make whole payment until Oct. 15, 2014 and April 15, 2015, which makes calling these notes uneconomical prior to late 2014.

Key Rating Drivers:

Declining Leverage and Meaningful Cash Flow Generation

Burger King's rent-adjusted leverage has declined from nearly 7.0x to approximately 5.0x following the October 2010 leveraged buy-out by 3G Capital Partners, Ltd. The improvement has been due to the positive impact of reduced G&A expenses and SSS growth on operating income and cash flow. Selling, general, and administrative expenses declined to $346 million in 2012 from $417 million in 2011 and as mentioned previously global SSS increased 3.2% versus a decline of 0.5% in 2011.

Additionally, a growing percentage of franchised units, which provide high-margin royalty-based revenue, are improving Burger King's ability to generate more stable operating cash flow. Lower capital expenditures as franchisees fund remodeling and new unit growth along with a modest common dividend should also support discretionary FCF. Burger King expects capital expenditures to decline to $30 - $40 million in 2013, from $70 million in 2012, and increased its quarterly dividend to $0.05/share resulting in an approximate $70 million annual cash outflow for 2013.

Same-Store Sales (SSS) Growth and Net New Unit Development

SSS performance and net new unit growth are important rating drivers for Burger King's credit ratings, as they are a key indicator of the health of the Burger King system. As a fully franchised entity, these business statistics are expected to provide insight on operating earnings and cash flow trends. Fitch believes premium menu items such as the recently launched Avocado and Swiss Whopper, a new improved coffee platform, value-oriented promotions, and limited time offers to drive transactions will support SSS performance during 2013, although the firm will lap strong comparisons in the first half. Moreover, master franchise JV agreements established during 2012 should support meaningful new unit development in markets including Asia, Eastern Europe, Latin America, and South Africa during 2013.

North American Operations

Improvement in Burger King's North America operations is a key factor in Fitch's ratings as the region represented 63% of Burger King's $751 million of adjusted EBITDA excluding unallocated management general and administrative expenses and 58% of the firm's 12,997 system wide restaurants in 2012. Fitch views Burger King's progress related to its four pillar strategy - Menu, Marketing, Image, and Operations - for North America positively as the company is experiencing improvement in guest satisfaction and is gradually broadening its customer base to include more women and customers over the age of 50.

Burger King's reorganized field organization and new mandatory on-line training for operators should improve store-level operations and strengthen its relationship with franchisees. Furthermore, recent refranchising agreements have been structured to include required remodeling, solidifying the firm's ability to reach its goal of having 40% of its North America system remodeled by 2015. At Dec. 31, 2012, the Burger King system had reimaged 19% of its 7,476 units in the U.S. and Canada, an improvement from 11% at the beginning of 2012.

Recovery Ratings:

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. Collateral for this debt includes a perfected first-priority security in interest in substantially all of Burger King's and each guarantor's assets including intangible assets, subject to certain exceptions. Conversely, the 'B+/RR4' rating on Burger King's 9.875% 2018 notes is due to Fitch view that recovery would be average or in the 31% - 50% range in a distressed situation.

The 'B-/RR6' rating on BKCH's and BKCF'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 $5.6 billion of assets at Dec. 31, 2012.

Liquidity and Maturities:

Burger King has consistently maintained good liquidity. At Dec. 31, 2012, the firm had $547 million of cash and at Sept. 30, 2012, $118.5 million of revolver availability net of letters of credit. Liquidity is supported by the firm's FCF, which Fitch projects can average at least $150 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 at a rate of $6.4 million per quarter, 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.

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 up to $450 million of cash, 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 good 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 anticipates that Burger King will not be required to make an excess cash flow payment in 2013.

Rating Sensitivities

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 falls below the 4.5x range, along with continued strong FCF could result in an upgrade in Burger King's ratings;

--Sustainably strong SSS performance, particularly in North America, 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 in ratings.

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).

Applicable Criteria and Related Research:

Corporate Rating Methodology


Fitch Ratings
Primary Analyst
Carla Norfleet Taylor, CFA, +1-312-368-3195
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
Secondary Analyst
Judi M. Rossetti, CPA/CFA, +1-312-368-2077
Senior Director
Committee Chairperson
Mark Oline, +1-312-368-2073
Managing Director
Media Relations
Brian Bertsch, +1-212-908-0549

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