S&P Rates New Burger King (BKW), Tim Hortons (THI) Combined Company at 'B+'

Standard & Poor's Ratings Services assigned its 'B+' corporate credit rating to 101178 B.C. Unlimited Liability Co. (Newco), the proposed parent to Burger King (NYSE: BKW) and Tim Hortons (NYSE: THI). The outlook is stable.

At the same time, we assigned a '3' recovery rating and 'B+' issue-level rating to Newco's proposed $500 million senior secured revolving credit facility and $6.75 billion senior secured first-lien term loan. The '3' recovery rating indicates our expectations of meaningful (50%-70%) recovery of principal in the event of default.

We also assigned a 'B-' issue-level rating to the $2.25 billion senior secured second-lien notes, with a '6' recovery rating, indicating our expectation of negligible (0%-10%) in the event of default.

We also removed the rating on Burger King Corp. from CreditWatch with negative implications, and equalized the rating to that of Newco.

"The rating action comes as Newco issues the debt to fund the combination of Burger King and Tim Hortons," said credit analyst Charles Pinson-Rose. "We expect a parent of Newco to issue new equity and receive $3 billion or preferred equity investment from Berkshire Hathaway Inc. with a 9% dividend to facilitate the transaction. For the purposes of the rating, we consider the preferred equity as debt-like and adjust debt for the preferred amount and adjust interest for the dividend amount Accordingly we expect the pro forma ratio of debt to EBITDA to be in the mid- to high-7x range, but we expect the company to reduce leverage quickly, possibly to the mid- to low-6x area over the next two years."

Our outlook on Newco is stable, which incorporates our assumptions that both Burger King and Tim Hortons can improve profits from restaurant growth and moderate increases in same-store sales, and generate meaningful excess cash flow. These factors will lead to moderate credit ratio improvement, although we expect leverage ratios to remain commensurate with a highly leveraged financial risk profile.

Upside Scenario

We would consider a higher rating if leverage were below 5x with our calculations (which include the expected $3 billion of preferred stock and minimum operating lease commitments without adjusting for lease receipts). This could occur over several years if EBITDA (before any lease adjustments) was near $2 billion (roughly 35% higher than expected pro forma levels) and the company reduced debt by $2 billion.

Downside Scenario

We could lower the rating if our assumption of profit growth and free cash flow leading to considerable deleveraging did not occur. For example, if credit ratios are simply maintained because of flat profits, tepid restaurant growth, and negative same-store sales, we could consider a lower rating.

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