Fitch Affirms Burger King's IDR at 'BB'; Outlook Revised to Stable

October 30, 2009 12:52 PM EDT

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has affirmed Burger King Corporation's (Burger King) (NYSE: BKC) ratings as follows:

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

--Secured bank credit facility at 'BB+'.

The Rating Outlook has been revised to Stable from Positive. At Sept. 30, 2009, Burger King had approximately $890 million of debt, most of which is secured.

Burger King's ratings reflect its positive free cash flow (FCF) generation, competitive position in the quick service restaurant (QSR) sector and improving system-wide operating infrastructure. The company is making noticeable progress with guest satisfaction and is implementing longer competitive hours of operation. The on-going rollout of its flexible batch broiler will foster the continued launch of additional products in order to help drive traffic. Burger King is also reinvesting in company-operated restaurants by remodeling units. The company has generated annual average FCF (defined as cash flow from operations less capital expenditures and dividends) of approximately $50 million since its reimaging program began in 2008.

The Outlook revision to Stable is due to the fact that operating trends have been weaker than Fitch had anticipated. Burger King's same-store sales (SSS) growth decelerated and margins contracted more than expected throughout fiscal 2009. SSS performance also lagged national peers in the first quarter of fiscal 2010 ended Sept. 30, 2009. During this period, world-wide SSS declined 2.9%, compared to a 3.6% increase during the first quarter ended Sept. 30, 2008.

Fitch believes Burger King will continue to benefit from its barbell menu strategy of indulgent and value offerings; such as its premium Steakhouse burgers and its $1 1/4 Pound Double Cheeseburger. However, SSS comparisons could remain negative in the near term, given higher rates of unemployment among the company's core customer demographics.

Fitch anticipates that weak top line growth will result in modest additional deterioration in leverage ratios over the near term. Fitch does not expect a slight weakening in Burger King's credit statistics to have further negative rating implications, given that there is room in the current ratings.

For the latest 12 month period ended Sept. 30, 2009, Burger King's adjusted leverage (defined as total debt plus eight times gross rent expense divided by operating earnings before interest, taxes, depreciation, amortization, and gross rent expense or EBITDAR) was approximately 3.7 times (x), versus 3.6x for the fiscal year ended June 30, 2009. During fiscal 2010, Burger King plans to repay $62.5 million of scheduled debt amortization and expects flat year-over-year U.S. commodity costs.

At Sept. 30, 2009, Burger King had $237.1 million of liquidity which included $132.5 million of cash and $104.6 million available on its $150 million secured revolver due June 30, 2011. The company generated $8.3 million of FCF; down modestly from the $11 million generated during last year's fiscal first quarter. Fitch anticipates that Burger King can generate at least $50 million of FCF in fiscal 2010. Fiscal 2010 and 2011 debt obligations are limited to scheduled amortizations on the remaining $134.4 million balance on its Term A bank loan due in fiscal 2011. The remaining $666 million balance on its Term B loan is due in fiscal 2012.

Burger King's bank facility subjects the company to various financial covenants; including a maximum leverage ratio of 3.0x and maximum yearly capital expenditures of $200 million or $250 million if rent-adjusted leverage is less than 3.0x. Maximum leverage is defined as debt, net of unrestricted cash in excess of $50 million, to EBITDA. At Sept. 30, 2009, Burger King had substantial room under this covenant. Maximum leverage as defined by the bank agreement was 1.8x. Burger King expects to spend $175 million - $200 million on capital expenditures in fiscal 2010, after spending $204 million in fiscal 2009.

Additional information is available at www.fitchratings.com.

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    Source: Fitch Ratings

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