Fitch Ratings has assigned issuer and expected issue level ratings related to Burger King Worldwide, Inc.'s (Burger King; NYSE: BKW) proposed acquisition of Tim Hortons, Inc. The debt is being issued by 1011778 B.C. Unlimited Liability Company (NewCo) - a new legal entity created to effect the transaction. Ratings, which are based on Fitch's expectations regarding final terms and conditions, are as follows:

NewCo (Canadian borrower and U.S. co-borrower)

• Long-term Issuer Default Rating (IDR) 'B'/Outlook Stable;
• Senior secured revolver 'BB/RR1';
• Senior secured term loan B 'BB/RR1';
• Senior secured 2nd lien notes 'B/RR4'.

Fitch maintains the Rating Watch Negative on Burger King and its subsidiaries. The ratings were placed on Negative Watch on Aug. 27, 2014 following the firm's definitive agreement to acquire Tim Hortons. Resolution of the Negative Watch will occur upon transaction closing or more certainty regarding the amount and timing of repayment of Burger King's existing debt. A list of Burger King's current ratings is at the end of this release.

KEY RATING DRIVERS

High Pro forma Debt, Gross Leverage

Pro forma debt is expected to include the proposed $6.725 billion seven-year senior secured term loan B, $2.25 billion of 7.5-year 2nd lien senior secured notes, and roughly $200 million of capital leases. Approximately $4 billion of existing debt at Burger King and Tim Hortons is expected to be repaid, although the timing and ultimate amounts remain uncertain. Pro forma total adjusted debt-to-EBITDAR exceeds 7.0x, excluding synergies. Fitch has also classified $3 billion of 9% preferred stock contributed by Berkshire Hathaway as 50% debt/50% equity due to debt-like characteristics.

Collateral for the guaranteed senior secured facility, which includes a $500 million five-year revolver and the above mentioned term loan, includes a first-priority lien on substantially all property of the borrower and guarantors. Financial covenants are limited to a springing maintenance covenant of 6.5x net first lien leverage if the revolver is 30% drawn. The term loan amortizes at 1% of principal annually. The guaranteed 2nd lien notes are secured by a second-priority interest in the collateral securing the credit facilities. The notes contain make-whole, equity clawback and change of control provisions.

Ratings reflect Fitch's views regarding the deleveraging and the free cash flow (FCF) generating ability of the new combined company, the stability of its operating cash flow, and on-going liquidity. Fitch believes total adjusted debt-to-EBITDAR can approach 6.0x within two years of transaction closing and that annual FCF (defined as cash flow from operations less capital expenditures and dividends) will exceed $300 million excluding any one-time costs.

Deleveraging should be enabled by EBITDA growth, given net restaurant expansion and positive same-store sales, and modest debt reduction. Ratings consider potential synergies, the ability of the Tim Hortons brand to succeed outside of its core Canadian market, and the currency mismatch related to the firm's U.S. denominated obligations and non-U.S. cash flows.

Liquidity will be supported by the company's $500 million revolver and a meaningful cash balance which is expected to exceed $300 million on a pro forma June 30, 2014 basis. Fitch expects future cash balances to depend on FCF generation and the firm's financial strategy related to cash flow usage. Moreover, partnership exchangeable units issued as part of the transaction's structure may be exchanged, at the discretion of the parent holding company, for cash or common shares of the new publicly traded Holding company after the one-year anniversary of the merger. This potential cash outflow could be a drain on liquidity or lead to higher debt levels.

Recovery Analysis

The expected 'BB/RR1' rating on the proposed senior secured credit facility reflects Fitch's view that recovery would be outstanding at 91%-100% even in a distressed situation. The 'B/RR4' rating on the 2nd lien notes corresponds to average potential recovery in the 31%-50% range. Ratings incorporate Fitch's opinion regarding the new company's enterprise value as a going concern and the mix of 1st lien and 2nd lien debt in the new company's capital structure.

Ratings on Burger King's existing debt are expected to be withdrawn. However, should any of the firm's senior unsecured $795 million 9.87% 2018 notes or $478 million 11% 2019 discount notes remain outstanding respective ratings will be downgraded multiple notches due to significant subordination and the probability of 0% recovery in a distressed situation. Fitch would assign new ratings to any of Tim Hortons' privately placed notes that remain outstanding. Tim Hortons' debt includes three series of privately placed senior unsecured notes with change of control provisions that require the borrower to make an offer to repurchase the notes.

To view Fitch Rating's entire release, click here.