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Rating Action:

Moody's changes 1011778 B.C.'s outlook to negative; affirms Ba3 CFR

02 Apr 2020

New York, April 02, 2020 -- Moody's Investors Service ("Moody's") today affirmed 1011778 B.C. Unlimited Liability Co.'s ("1011778 B.C.") Ba3 Corporate Family Rating (CFR), Ba3-PD Probability of Default Rating (PDR), Ba2 senior secured first lien bank credit facility ratings, Ba2 senior secured first lien note ratings, and B2 secured second lien notes rating. Moody's also affirmed Tim Hortons Inc.'s (Tim's) B1 senior unsecured legacy notes. In addition, Moody's assigned a Ba2 rating to the company's proposed $500 million 1st lien senior secured notes. 1011778 B.C.'s Speculative Grade Liquidity rating was downgraded to SGL-2 from SGL-1. The ratings outlook was changed to negative from stable.

"The negative outlook reflects the risk that there may be a sustained weakening in 1011778 B.C.'s credit metrics as they are increasing debt levels at a time when the company is facing significant uncertainty surrounding the potential length and severity of restaurant closures and the ultimate impact that these closures will have on 1011778 B.C.'s revenues, earnings and liquidity." stated Bill Fahy, Moody's Senior Credit Officer. "The outlook also takes into account the negative impact on consumers ability and willingness to spend on eating out until the crisis materially subsides," Fahy added.

Assignments:

..Issuer: 1011778 B.C. Unltd Liability Co.

....Senior Secured Regular Bond/Debenture, Assigned Ba2 (LGD3)

Downgrades:

..Issuer: 1011778 B.C. Unltd Liability Co.

....Speculative Grade Liquidity Rating, Downgraded to SGL-2 from SGL-1

Outlook Actions:

..Issuer: 1011778 B.C. Unltd Liability Co.

....Outlook, Changed To Negative From Stable

..Issuer: Tim Hortons Inc.

....Outlook, Changed To Negative From No Outlook

Affirmations:

..Issuer: 1011778 B.C. Unltd Liability Co.

.... Probability of Default Rating, Affirmed Ba3-PD

.... Corporate Family Rating, Affirmed Ba3

....Senior Secured Bank Credit Facility, Affirmed Ba2 (LGD3)

....Senior Secured 2nd Lien Regular Bond/Debenture, Affirmed B2 (LGD5)

....Senior Secured 1st Lien Regular Bond/Debenture, Affirmed Ba2 (LGD3)

..Issuer: Tim Hortons Inc.

....Senior Unsecured Regular Bond/Debenture, Affirmed B1 (LGD5)

RATINGS RATIONALE

The affirmation of the Ba3 CFR reflects the continuation of drive-through, delivery and curbside pick-up operations, good liquidity to manage through several months of significant revenue decline, and Moody's expectation that 1011778 B.C. will manage the business to preserve liquidity and then use cash flow to reduce debt once the crisis subsides. The downgrade of the Speculative Grade Liquidity to SGL-2 indicates good liquidity and reflects the negative impact on 1011778 B.C.'s cash flow generation over the near term driven by the restrictions and closures placed on its restaurants. The SGL-2 is supported by its significant cash balances of approximately $3.0 billion (inclusive of proposed note offering) and the absence of any near-term maturities. Cash balances increased as a result of 1011778 B.C. fully drawing down its revolving credit facility and will be further bolstered by the proposed $500 million note offering.

The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The restaurant sector has been one of the sectors most significantly affected by the shock given its sensitivity to consumer demand and sentiment. More specifically, the weaknesses in 1011778 B.C.'s credit profile, including its exposure to widespread location restrictions and closures have left it vulnerable to shifts in market sentiment in these unprecedented operating conditions and 1011778 B.C. remains vulnerable to the outbreak continuing to spread. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. Today's action reflects the impact of the breadth and severity of the shock, and the broad deterioration in credit quality it has triggered.

1011778 B.C.'s Ba3 CFR benefits from its brand recognition and meaningful scale in terms of systemwide units of its three restaurant concepts, Burger King, Popeyes and Tim Hortons. The company's franchised focused business model that provides more stability to earnings and cash flow, diversified day part and food offerings, and good liquidity are also credit positive. 1011778 B.C. is constrained by its relatively high leverage and modest retained cash flow to debt, as well as the high level of promotional activities by competitors and a value focused consumer that will continue to pressure same store operating performance.

Corporate governance risks at 1011778 B.C. is low given its diversified board structure and consistent operating track record. In addition, 3G Restaurant Brands Holdings LP, an affiliate of private investment firm 3G Capital Partners, Ltd has continued to reduce its ownership in the company to approximately 32% of the combined voting power with respect to 1011778 B.C.'s parent company Restaurant Brands International.

Restaurants by their nature and relationship with regards to sourcing food and packaging, as well as having an extensive labor force and constant consumer interaction are deeply entwined with sustainability, social and environmental concerns. While these may not directly impact the credit, these factors should positively impact brand image and result in a more positive view of the brand overall.

Factors that would lead to an upgrade or downgrade of the ratings:

Factors that could result in an upgrade include a sustained strengthening of debt protection metrics with debt to EBITDA of around 5.0 times and maintaining EBIT coverage of interest of around 3.0 times. A higher rating would also require the company's commitment to preserving credit metrics during periods of operating difficulties and to maintain very good liquidity.

Factors that could result in a downgrade include a sustained deterioration in credit metrics despite a lifting of restrictions on restaurants and a subsequent recovery in earnings and liquidity with debt to EBITDA above 5.75 times or EBIT to interest under 2.5 times on a sustained basis.

1011778 B.C. Unlimited Liability Company, owns, operates and franchises over 18,000 Burger King hamburger quick service restaurants, more than 4,880 Tim Hortons restaurants and over 3,190 Popeyes restaurants. Annual revenues are around $5.4 billion, although systemwide sales are over $33 billion. 3G Restaurant Brands Holdings LP, owns approximately 32% of the combined voting power with respect to RBI and is affiliated with private investment firm 3G Capital Partners, Ltd.

The principal methodology used in these ratings was Restaurant Industry published in January 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1108012. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating outcome announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

William V. Fahy
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Margaret Taylor
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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