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4 years ago
Fitch Downgrades Heinz to 'BB-' & Rates Proposed Debt; Outlook Stable
March 12, 2013 / 7:36 PM / 4 years ago

Fitch Downgrades Heinz to 'BB-' & Rates Proposed Debt; Outlook Stable

(The following statement was released by the rating agency) CHICAGO, March 12 (Fitch) Fitch Ratings has resolved the Rating Watch Negative placed on H.J. Heinz Company (Heinz) and its subsidiaries on Feb. 15, 2013 following the Berkshire Hathaway, Inc. (Berkshire) and 3G Partners Ltd. (3G) buyout announcement. The transaction is valued at $28 billion, including the assumption of $5.3 billion of debt including hedge accounting adjustments at Jan. 27, 2013, and represents roughly 13.0x Heinz's LTM EBITDA of $2.2 billion. The buyout is expected to close in the third quarter of 2013, subject to shareholder and regulatory approval. The financing terms and expected capital structure have been reviewed. On the assumption that the buyout will occur, Fitch has downgraded the long-term ratings of H.J. Heinz Company (Heinz) and its subsidiaries and revised the Rating Outlook to Stable. Fitch has downgraded the following ratings: H.J. Heinz Co. --Long-term Issuer Default Rating (IDR) to 'BB-' from 'BB+'; --Senior unsecured notes to 'BB-' from 'BB+'. H.J. Heinz Finance Co. --Long-term IDR to 'BB-' from 'BB+'; --Senior unsecured notes to 'BB-' from 'BB+'. H.J. Heinz Finance UK Plc. --Long-term IDR to 'BB-' from 'BB+'; --Senior unsecured notes 'BB-' from 'BB+'. Fitch has affirmed the following ratings: H.J. Heinz Co --Short-term IDR at 'B'; --Commercial paper (CP) at 'B'; --Bank facilities at 'BB+'. H.J. Heinz Finance Co. --Short-term IDR at 'B'; --CP at 'B'; --Bank facilities at 'BB+' (as co-borrower); --Series B Preferred Stock at 'BB-'. Fitch has concurrently assigned the following ratings to the proposed debt used to finance the buyout by Berkshire and 3G: Hawk Acquisition Sub., Inc. (to be merged into H.J. Heinz Co. at closing) --Secured credit facility 'BB+'; --2nd lien notes 'BB'. Hawk Acquisition Holding Corp. (Parent) --Long-term IDR 'BB-'. Fitch expects to withdraw the following ratings on existing facilities upon closing of the transaction: H.J. Heinz Co. --Bank facilities 'BB+'; --Commercial paper (CP) 'B'. H.J. Heinz Finance Co. --Bank facilities 'BB+' (as co-borrower). --CP 'B'; --Series B Preferred Stock 'BB-'. Financing for the buyout includes $4.12 billion of common equity from 3G and $12.12 billion of equity, inclusive of $8 billion of preferred equity with warrants, from Berkshire. Additionally, Hawk Acquisition Sub., Inc. (Hawk) intends to issue $10.5 billion of first-priority term loans due 2019 and 2020 along with a $1.5 billion first-priority revolver. Hawk also plans to issue $2.1 billion of long-term second-lien notes at or prior to transaction close or enter into a second-lien bridge facility of up to $2.1 billion to the extent such notes are not issued. Key Rating Drivers: The rating actions balance Heinz's highly leveraged capital structure post buyout with its low business risk, above-average revenue growth, potentially higher operating income as a private firm, and consistent cash flow generation. 3G has proven its ability to increase operating profitability and de-lever acquired firms. Anheuser Busch InBev NV/SA and Burger King Worldwide, Inc. both experienced significant margin expansion and steady deleveraging after being acquired by 3G. Fitch expects Heinz's operating EBITDA growth to exceed the firm's 4%-6% historical average under its new ownership structure due to the combination of mid-single digit organic revenue growth and cost reductions. Fitch also believes Heinz is capable of generating average annual FCF of more than $200 million over the two years following the buyout, despite a substantial increase in interest expense and $720 million of annual preferred dividends. Annual operating cash flow and FCF averaged $1.2 billion and over $425 million, respectively over the past 10 years. Heinz's low business risk and the stability of its operations have been demonstrated over time as the firm's revenue and operating earnings held up well during the recent global economic slowdown. Even with an approximate 30% exposure to pressured European consumers, the firm has continued to take pricing and grow volumes. Growth in emerging markets will continue to outpace that of developed markets with opportunities to further expand Heinz's core portfolio of meals/snacks, ketchup/sauces, and infant nutrition around the globe in both retail and foodservice. Integrated into the ratings is Fitch's treatment of the $8 billion 9% cumulative perpetual preferred stock to be held by Berkshire. Fitch has classified 50% of the principal as equity and 50% as debt. The terms of the preferred allow for dividend deferral and the existence of incentives to issue common equity reduces the company's overall financial risk. Pro forma total debt adjusted for the equity treatment of these hybrid securities will approximate $17 billion and total debt with equity credit-to-operating EBITDA will exceed 7.0x, up from roughly $5 billion and 2.4x, respectively for the LTM period ended Jan. 27, 2013. Nonetheless, Fitch anticipates that total debt with equity credit-to-operating EBITDA can decline to below 6.0x within two years of the buyout based on significant anticipated operating earnings growth and modest debt reduction. The ratings also incorporate Heinz's product and geographic diversification and leading market share positions in major product categories. Ketchup and sauces represented 45% of fiscal 2012 sales while meals and snacks represented 38%, infant nutrition represented 11%, and other products represented the remaining 6%. Heinz generates about two-thirds of its sales outside the U.S., with emerging markets representing nearly 25% of the firm's $11.6 billion of revenue. For the nine months ended Jan. 27, 2013, organic revenue growth was 3.7% due to 2.1% pricing and 1.6% volume growth. Volume gains in emerging markets were partially offset by declines in Continental Europe, Australia, and Italy while pricing increased across developing markets as well as in Continental Europe and U.S. food service. Reported operating income increased 9.4% to $1.28 billion for the nine-month period due to benefits of higher pricing, volume, and productivity initiatives. Liquidity, Maturities, Covenants, and Collateral: Heinz has historically maintained high levels of liquidity with year-end cash averaging over $1 billion since 2011. Liquidity and on-going financial flexibility is expected to remain adequate despite considerable debt levels following the buyout. Heinz will maintain a $1.5 billion five-year revolver and is expected to continue to hold high cash balances as cash flow generation remains robust. Fitch views the ability to defer $720 million preferred dividend as being a potential lever partners could pull should there be an unanticipated deterioration in cash flow and/or liquidity constraints. Berkshire's 50% common equity stake supports this view. Solid FCF generation will be enabled by EBITDA growth and the potential for additional working capital improvement. The $720 preferred dividend is a moderately incremental replacement to the $650 million of common dividends distributed by Heinz prior to the buyout. Capital expenditures should also decline modestly as spending behind Heinz's Project Keystone, a multi-year program to drive productivity and standardize systems, comes to an end. Maturities will be limited in the intermediate term, eliminating refinancing risk should market conditions worsen. Debt incurred for the transaction is expected to have maturities five to seven years out. Financial covenants are expected to be minimal for the newly issued debt. Existing debt that will not be refinanced as part of this transaction (roll over notes) are long dated and are not likely to be due until 2028, 2030, 2032 and 2039. In terms of collateral, the first-priority debt will be secured by a perfected first-priority security interest in substantially all tangible and intangible property with carve-outs that include Principal Property as defined by indentures governing rollover notes. Based on Fitch's interpretation this includes the gross book value of certain manufacturing, processing plant or warehouses located in the U.S. Fitch views the value of the collateral as meaningful as it is substantially based on the value of Heinz's trademarks; which include namesake Heinz, Ore-Ida, and Smart Ones. Collateral for junior-lien debt will include a second-priority security interest in assets securing the first-priority debt. Rating Sensitivities: An upgrade of Heinz's ratings is not anticipated in the near term. However, faster than expected deleveraging, accelerated top line growth, and greater than projected cost reductions would be viewed positively making upward migration in ratings possible. A commitment to operating with total debt with equity credit-to-operating EBITDA below 5.0x and continued generations of meaningful FCF would also be a prerequisite for any upgrades. Further downgrades could occur if deleveraging is slower than Fitch expected or total debt with equity credit-to-operating EBITDA is maintained in the 7.0x range. Failure to achieve cost reduction targets, weakening organic growth or margin contraction, or increased debt levels could trigger adverse rating actions. The inability to generate FCF or a sustained loss of market share in core product categories would also be viewed negatively. Contact: Primary Analyst Carla Norfleet Taylor, CFA Director +1-312-368-3195 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 Secondary Analyst Grace Barnett Director +1-212-908-0718 Committee Chairperson Mark Oline Managing Director +1-312-368-2073 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. Additional Information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. Applicable Criteria and Related Research: --'Corporate Rating Methodology' (Aug. 8, 2012); --'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis' (Dec. 13, 2012); --'Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers' (Nov. 12, 2012); --'Fitch Downgrades Heinz to 'BB+' on Buyout Announcement; Places Ratings on Negative Watch' (Feb. 15, 2013). Applicable Criteria and Related Research Corporate Rating Methodology here Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis here Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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