S&P raises Burger King Corp ratings

Overview
     -- Global restaurant operator Burger King has enhanced credit protection 
measures, a result of both profit growth and debt reduction; we expect those 
trends to continue.
     -- We are raising our ratings on the company one notch, including the 
corporate credit rating to 'B+' from 'B'.
     -- The stable outlook incorporates further credit ratio enhancement in 
2012 resulting from positive comparable-store sales, international store 
expansion, and cost management.

Rating Action
On Aug. 15, 2012, Standard & Poor's Ratings Services raised its corporate 
credit rating on the Miami-based Burger King Corp. to 'B+' from 'B'. The 
outlook is stable.

At the same time, we raised the issue-level rating on the company's senior 
secured credit facility to 'BB' from 'BB-'. We rate the facility two notches 
above the corporate credit rating, and the recovery rating on the facility 
remains '1' indicating our expectation of very high (90%-100%) recovery of 
principal in the event of payment default. 

We also raised the issue-level rating on the company's senior unsecured notes 
to 'B' from 'B-'. We rate the notes one notch below the corporate credit 
rating and the recovery rating remains '5', indicating our expectation of 
modest (10%-30%) recovery of principal in the event of default. 

In addition, we raised the rating on the company's discount notes to 'B-' from 
'CCC+'. We rate these notes two notches below the corporate credit rating, and 
the recovery rating remains '6', which indicates our expectation of negligible 
(0%-10%) recovery of principal in the event of default.

Rationale
The rating action comes after Burger King's positive operating trends in 2012. 
Year-to-date EBITDA is up close to 20%, reflecting comparable-store sales 
growth of 4.5%, international restaurant expansion, and administrative cost 
management. While we expect sales trends may moderate for the remainder of 
2012, we are still forecasting meaningful profit growth. Moreover, the company 
has generated significant free cash flow and reduced debt, and we foresee this 
continuing. 

The rating on Burger King reflects our view of the company's financial risk 
profile as "highly leveraged," based on forecasted credit ratios. We also 
assess its business risk as "fair," which incorporates the highly competitive 
nature of the industry and its susceptibility to economic conditions that 
somewhat offsets Burger King's global presence, domestic market share, and 
recent operational improvements.

The company's first-half performance was moderately better than we 
anticipated, and generally better than industry peers. We believe its new 
product offerings, and support from its marketing campaign led to the 
comparable-store sales growth domestically. We expect that trend to moderate 
for the remainder of 2012 because of weak economic conditions and increased 
competition within the industry, but we foresee these sales remaining 
positive. Burger King's profits also benefited from administrative cost 
management, which was down 4.5% year to date. Moreover, the company recently 
completed a number of refranchising transactions this year, which we believe 
will also be margin accretive. 

Below are our more detailed operating assumptions for Burger King during 2012:
     -- Systemwide comparable-store sales growth of about 4%;
     -- Close to 500 new restaurants-mostly by franchisees internationally;
     -- Administrative expense to be down between 5%-7%; 
     -- EBITDA in the range of $650 million-$660 million, up from $585 million 
in 2011; and
     -- We also assume a portion of excess free cash flow will be allocated 
toward debt reduction.

This scenario would lead to the following credit ratios, adjusted primarily 
for operating leases, at the end of 2012:
     -- Debt to EBITDA in the low-5x range;
     -- EBITDA coverage of interest near 2.5x; and
     -- Funds from operations (FFO) to debt near 12%.

These credit ratios are indicative of a highly leverage financial risk profile.

We generally view the restaurant industry as weak, but Burger King's market 
share and its largely franchised restaurant system provide some operational 
stability and, thus, a better business risk assessment than many others in the 
industry. However, we believe Burger King's performance will not only be 
vulnerable to consumer spending trends, but that it may also be susceptible to 
incursions from competitors like McDonald's Corp. and The Wendy's Co. in the 
fast food arena. Given high unemployment and potentially tepid domestic job 
growth, the industry may engage in further aggressive promotional discounting, 
which could hurt sales and profits.

Liquidity
We view Burger King's liquidity as "adequate," which indicates our view that 
cash sources should exceed uses by a ratio of at least 1.2 to 1.0 over the 
next two years. The company's sources (as of June 30, 2012) include $378 
million of cash, which we consider mostly excess; $138.5 million of revolving 
credit availability; and FFO, which we forecast to be approximately $375 
million over the next year. We expect uses to primarily consist of capital 
spending of about $60 million, term loan amortizations, and debt reduction.

We base our assessment of Burger King's liquidity profile on the following 
expectations and factors:
     -- We expect sources to cover uses by more than 1.2x over the next two 
years.
     -- We also expect that sources would exceed uses, even with a 15% drop in 
EBITDA.
     -- We believe the company has adequate headroom under maintenance 
financial covenants.
     -- The company has no meaningful near-term maturities.

Recovery analysis
For the complete recovery analysis, see Standard & Poor's recovery report on 
Burger King, to be published as soon as possible on RatingsDirect. 

Outlook
Our outlook on Burger King is stable, incorporating our expectation that 
operating trends will continue to improve in the second half of 2012 and that 
Burger King will use free cash flows to reduce debt, leading to leverage in 
the low-5x area by the end of 2012.

We would consider a higher rating if we believed Burger King could further 
improve credit ratios such that adjusted leverage would be around 4.5x and 
coverage was near 2.8x. We do not foresee that occurring in 2012. However, if 
Burger King improved EBITDA to the range of $720 million-$730 million and the 
company reduced debt by an additional $350 million from current levels, we 
estimate the company could reach those thresholds.

We could consider a lower rating if operating trends worsened and the company 
ceased to repay debt with excess cash flow. For example, if leverage was in 
the mid-5x area and coverage in the low-2x area, we would likely lower the 
rating. This could occur if the company meets our expectations for 2012, but 
in 2013, EBITDA declined by about 16%-18% and the company did not repay any 
debt with excess cash flow.

Related Criteria And Research
     -- Issuer Ranking: U.S. Restaurants & Retail, Strongest To Weakest, April 
30, 2012
     -- Industry Report Card: Our Credit Outlook Remains Slightly Negative For 
The U.S. Retail Industry This Year, April 30, 2012
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
     -- Business Risk/Financial Risk Matrix Expanded, May 27, 2009
     -- Key Credit Factors: Business And Financial Risks In The Retail 
Industry, Sept. 18, 2008 
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008

Ratings List

Upgraded
                                        To                 From
Burger King Corp.
Burger King Capital Holdings LLC
 Corporate Credit Rating                B+/Stable/--       B/Stable/--

Burger King Corp.
 Senior Secured                         BB                 BB-
   Recovery Rating                      1                  1
 Senior Unsecured                       B                  B- 
   Recovery Rating                      5                  5

Burger King Capital Finance Inc.
Burger King Capital Holdings LLC
 Senior Unsecured                       B-                 CCC+
   Recovery Rating                      6                  6