Fitch Adjusts or Withdraws Ratings on Certain Heinz Debt Upon Deal Closing

CHICAGO--()--Fitch Ratings has withdrawn the following ratings upon the close of Berkshire Hathaway (Berkshire) and 3G Capital's (3G) acquisition of the H.J. Heinz Company (Heinz) on June 7, 2013.

H.J. Heinz Co.

--Senior unsecured bank facilities 'BB+';

--Short-term IDR 'B'.

--Commercial paper 'B'.

H.J. Heinz Finance Co.

--Senior Unsecured bank 'BB+' (as co-borrower);

--Short-term IDR 'B';

--Commercial paper 'B'.

Concurrently, Fitch has upgraded the ratings of H.J. Heinz UK Finance Plc's 6.25% notes due 2030 to 'BB' from 'BB-'. These notes became equally and ratably secured with the 2nd lien notes at the closing of the transaction.

Fitch has also downgraded H.J. Heinz Finance Co.'s Series B preferred stock to 'B' from 'BB-', due to its subordination in the capital structure. These securities are expected to be redeemed on July 15, 2013.

Hawk Acquisition Sub., Inc. was merged into H.J. Heinz Co. at closing.

The current ratings of Heinz, Hawk Acquisition Holding Corp. and its subsidiaries are as follows (taking into account the actions above):

Hawk Acquisition Holding Corp. (Parent)

--Long-term Issuer Default Rating (IDR) 'BB-'.

H.J. Heinz Co.

--Long-term IDR 'BB-';

--Secured credit facility 'BB+';

--2nd lien notes 'BB';

--Senior unsecured notes 'BB-'.

H.J. Heinz Finance Co.

--Long-term IDR 'BB-';

--Senior unsecured notes BB-;

--Series B preferred stock 'B'.

H.J. Heinz Finance UK Plc.

--Long-term IDR 'BB-';

--2nd lien notes 'BB'.

The Rating Outlook is Stable.

The transaction was valued at $28 billion, including the assumption of $5.3 billion of debt with hedge accounting adjustments at Jan. 27, 2013, and represents roughly 13.0x Heinz's latest 12 months (LTM) EBITDA of $2.2 billion. The debt financing for the buyout included $9.5 billion of first-priority U.S. term loans due 2019 and 2020, a $2 billion first-priority revolver (undrawn at closing), and $3.1 billion of second-lien notes due 2020. Berkshire invested $12.25 billion of equity, inclusive of $8 billion of preferred equity with warrants, and 3G invested $4.25 billion of common equity.

Existing debt that was not refinanced as part of this transaction (rollover notes) includes: $231 million of 6.375% notes due 2028, $202 million of 6.25% notes due 2030, $435 million of 6.75% notes due 2032, and $931 million of 7.125% notes due 2039. A portion of the Change of Control Notes remain outstanding. As noted above, the $350 million series B preferred stock will be redeemed in July 2013. Heinz's $500 million senior unsecured notes due in July 2013 will also be repaid by maturity.

KEY RATING DRIVERS:

The ratings reflect Heinz's highly leveraged capital structure post buyout balanced 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 free cash flow (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. Fitch expects that 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 (preferred) 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 provide incentives to issue common equity, which reduces the company's overall financial risk.

Pro forma total debt adjusted for the equity treatment of these hybrid securities is approximately $18 billion. Total debt with equity credit-to-operating EBITDA exceeds 7.5x, up from roughly $5 billion debt and 2.4x for the LTM period ended Jan. 27, 2013. Fitch anticipates that total debt with equity credit-to-operating EBITDA can decline to below 6.0x within two to three 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 11%, and other products 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% as a result of 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 are expected to remain adequate despite considerable debt levels following the buyout. Heinz will maintain a $2 billion 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 in preferred dividends as being a potential lever equity 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 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 modest in the intermediate term, eliminating refinancing risk should market conditions worsen. Rollover notes are long dated and debt incurred for the buyout has maturities six to seven years out. Term loan amortization is manageable at 1% annually.

In terms of collateral, the first-priority debt is 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 plants 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 generation 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.

Additional Information is available at 'www.fitchratings.com'.

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: Heinz's Ratings Unaffected by Change in Buyout Funding; Outlook Stable; (March 22, 2013)

--'Fitch Downgrades Heinz to 'BB-' & Rates Proposed Debt; Outlook Stable' (Mar. 12, 2013)

--'Fitch Downgrades Heinz to 'BB+' on Buyout Announcement; Places Ratings on Negative Watch' (Feb. 15, 2013).

Applicable Criteria and Related Research:

Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=693773

Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=696670

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=793441

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Contacts

Fitch Ratings
Primary Analyst
Judi M. Rossetti, CFA/CPA, +1 312-368-2077
Senior Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Grace Barnett, +1 212-908-0718
Director
or
Committee Chairperson
Mark Oline, +1 312-368-2073
Managing Director
or
Media Relations:
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Judi M. Rossetti, CFA/CPA, +1 312-368-2077
Senior Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Grace Barnett, +1 212-908-0718
Director
or
Committee Chairperson
Mark Oline, +1 312-368-2073
Managing Director
or
Media Relations:
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com