Fitch Initiates Burger King Corporation IDR at 'B+'; Outlook Positive.

NEW YORK -- Fitch assigns initial ratings for Burger King Corporation (Burger King), the world's second largest fast food hamburger restaurant chain, as follows:

--Issuer Default Rating (IDR) 'B+';

--$1,117 million of remaining guaranteed senior secured credit facilities 'BB/RR2' (consisting of the following facilities):

--$150 million revolving credit facility maturing June 2011;

--$967 million aggregate remaining term loan A and B outstandings maturing June 2011 and June 2012, respectively;

The Outlook on all Ratings is Positive.

The ratings incorporate the capital structure and operations of Burger King pro-forma for parent company Burger King Holdings, Inc.'s initial public offering (IPO), which closed on May 18, 2006. Approximately 18.5% of the company's common equity was sold to the public at an offering price of $17 per share. Burger King's overall market capitalization upon the IPO was thereby imputed to be $2.26 billion. The IPO generated net proceeds for the benefit of the company approximating $397 million, of which $350 million was applied against existing outstanding term loans. The balance of the net proceeds will primarily be utilized to pay a $30 million termination fee related to the existing sponsor management agreement, along with various other fees and expenses. The ratings additionally reflect certain February 2006 transactions that were implemented by Burger King in advance of the IPO. The company incurred a new $350 million term loan and used about $55 million of cash on hand in connection with Burger King's February 2006 payment of both a $367 million dividend to shareholders and a $33 million make-whole payment to holders of options and restricted stock to compensate for dilution.

The 'B+' IDR rating reflects that Burger King remains a highly leveraged company within the very competitive quick serve restaurant (QSR) industry. The company's high debt balance and weak historical free cash flow performance are the result of several factors, including inattentive management of Burger King's operations by its former ownership, the incurrence of additional debt in conjunction with both the company's December 2002 buyout and its 2006 dividend payment, and significant recent investments in the global reorganization of Burger King and the operating turnaround of its franchisee base. Pro forma for the IPO and incorporating actual last-twelve-month (LTM) operating results through March 31, 2006, post-IPO leverage is currently estimated as follows: 4.0 times (x) for 'total balance sheet debt/EBITDA', 5.2x for 'total adjusted debt/EBITDAR (including as debt 8(x) net rent associated with operating leases)', and 5.7x 'total adjusted debt/EBITDAR (including as debt 8(x) gross rent associated with operating leases)'. (EBITDAR as used here is defined as operating earnings before interest, tax, depreciation, amortization, and rent expense. Net rent expense is equal to Burger King's total rent expense, net of rental income received from its franchisees.) In contrast, Burger King's almost 3.0x pro-forma EBIT coverage of gross interest is a comparatively strong credit metric relative to the company's peers within the 'B+' IDR rating category. 'Cash flow from operations/ total balance sheet debt' was satisfactory at approximately 20.5% for the LTM period, after factoring in the debt reduction resulting from the IPO.

Burger King's systemwide base of approximately 11,100 restaurants consists of about 11% company-owned stores and 89% franchised stores. This composition of restaurants contrasts sharply with that of Burger King's key competitors, as evidenced by the fact that the fast food hamburger restaurant chains McDonald's and Wendy's have only about 29% and 22% of their respective restaurants franchised. While this operating structure potentially enables Burger King to minimize its fixed cost base and its capital expenditures, the high proportion of non-owned restaurants also presents several obstacles. Burger King has limited control over its franchisees and a restricted ability to facilitate changes in restaurant ownership when management is dissatisfied with operator performance. As has been proven by experience, Burger King's ability to collect royalties and fees is at substantial risk when the franchisees are distressed. Burger King also faces the expiration of about 20% if its franchise agreements over the next five years, and cannot predict with assurance the rate at which these agreements will be either extended or formally renewed. The company reported that with regard to the franchise agreements that expired during the nine months ended March 2006, 45% were renewed, 29% were extended, 4% of the franchisees continued to operate with no agreement, and 22% of the affected restaurants were closed. It is not known to Fitch to what extent the franchised restaurant closures were attributable to an inability to negotiate terms, or instead due to the fact that they were underperforming operations. Burger King's 'Franchise Financial Restructuring Program' (FFRP), which was initiated in February 2003 to assist over one-third of the company's franchisees in the US and Canada, notably appears to be a key driver behind Burger King's steadily improving results. While the up-front costs of implementing the program have initially been significant, the ongoing benefits are already evident. Through fiscal year-end (FY) June 30, 2005, Burger King purchased an aggregate of 170 franchised restaurants, closed 56 franchised restaurants, and re-franchised 35 of these restaurants in connection with the FFRP initiative.

Burger King's approximately $1.1 million average annual revenues per restaurant currently lag meaningfully behind McDonald's average of more than $1.8 million. Burger King's current management team is implementing various initiatives to improve individual store performance, such as standardizing and improving menu offerings, filling in product gaps, introducing more health-conscious choices, extending hours of operation, refurbishing stores, and improving store design prototypes. Burger King's most significant growth opportunity centers on future planned initiatives for growth in international markets, where Burger King's restaurant base is currently only one-fourth the size of the McDonald's footprint.

Fitch's Positive Rating Outlook acknowledges the fact that Burger King's operating metrics have demonstrated steady improvement over the past few years and there is reason to expect that the favorable trend will continue, albeit at a more moderate pace. Burger King reports that it has achieved eight consecutive quarters of comparable stores sales growth, following seven prior consecutive quarters of comparable stores sales losses. Franchisees are notably generating a steadily higher portion of Burger King's overall restaurant-level operating income, having increased from a negative contribution during FY2003, to a positive contribution of about 20% during FY2004, 33% during FY2005, and an estimated at 45% year-to-date March 2006. However, Burger King's franchisees may be challenged to achieve further substantial improvement in operating income in the near term. Burger King's brand recognition remains strong, and its royalty income stream and real estate holdings provide additional value.

Fitch also believes that Burger King's access to the capital markets will be enhanced as a result of the company's IPO and new requirement to file public financial statements. The company has indicated that it plans to launch 200-250 new stores per year going forward, largely in international markets and through the use of qualified franchisees. Since expenditures associated with certain of these efforts are discretionary, Burger King would have the ability to curtail many of them in the event that operating conditions change. Fitch expects that Burger King's equity sponsorship will be less likely to seek future returns of capital in the form of dividends and other distributions, now that there exists a definitive mechanism to exit their investment through the public sale of stock.

The following are examples of future events that could potentially cause Fitch to lower Burger King's Outlook or ratings:

--The occurrence of a material reduction in the systemwide base of restaurants;

--Significant revenue declines attributed to weakening economic conditions or aggressive competitor initiatives;

--A declaration by the board of directors of another sizeable dividend or similar initiatives to enhance investment returns for the equity sponsors; or

--The occurrence of a severe incident involving food-borne illness or food tampering which results in public backlash.

Burger King's senior secured credit agreement was amended and restated during February 2006. Obligations under the agreement are guaranteed by substantially all material domestic subsidiaries, which account for about 65% of the company's consolidated revenue base. Collateral security consists only of pledges of 100% of the stock of domestic subsidiaries (with limited exceptions) and 65% of the stock of certain first-tier foreign subsidiaries. Financial covenants consist of an 'EBITDA/cash interest coverage ratio', a 'net debt/EBITDA' leverage ratio, and a capital expenditures limitation. While there are no direct loans currently outstanding under the $150 million revolving credit facility, there are approximately $42 million of open standby letters of credit in support of various insurance programs. Provisions already exist within the credit agreement permitting an aggregate of $150 million of additional term loans, subject to future lender commitments, pro-forma compliance with covenants, and no evidence of existing defaults. A 50% mandatory excess cash flow recapture provision exists as long as leverage (as defined) exceeds 3.0x. While Burger King has stated in its public filings that the company does not intend to pay dividends, dividends are permitted under the credit agreement subject to prescribed formulas and compliance with all covenants.

The recovery ratings (RR) and notching of Burger King's guaranteed senior secured credit facilities reflect Fitch's recovery expectations under a distress scenario. Fitch has used an enterprise value analysis for these recovery ratings, given the limited tangible asset base which exists in this company. The 'RR2' recovery rating assigned for Burger King's fully drawn senior secured commitment reflects Fitch's expectation that 71%-to-90% recovery would be achievable.

Pro-forma for the IPO, approximately 76% of Burger King's equity remains controlled by the group of three private equity sponsors which acquired the company from Diageo plc during December 2002. This sponsor group consists of affiliates of Texas Pacific Group, Bain Capital Partners, and Goldman Sachs, which respectively continue to hold about 28%, 24%, and 24% of the company's equity after factoring in IPO dilution and the exercise of certain over-allotments. It is notable that these equity sponsors have already realized a return of substantially all their originally invested equity capital and are now poised to realize a significant positive return. Fitch believes that the sponsors will pursue an exit strategy going forward that focuses on the gradual release of additional common shares for sale through the open market.

Fitch's Recovery Ratings (RR), introduced in 2005, are a relative indicator of creditor recovery on a given obligation in the event of a default. A broad overview of Fitch's RR methodology as it relates to specific sectors, including a Case Study webcast, can be found at http://www.fitchratings.com/recovery.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 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.