OREANDA-NEWS. Fitch Ratings has assigned a 'BB' rating to H.J. Heinz Company's (Heinz) proposed \$2 billion second lien secured notes due in 2025.

Heinz plans to use the net proceeds to repay a pro rata portion of the \$2.8 billion Term B-1 Loan and \$5.6 billion Term B-2 Loan for a leverage neutral transaction that improves the company's debt maturity profile. The notes will be senior secured second lien obligations and rank pari passu with Heinz's \$3.1 billion 4.25% notes due Oct. 15, 2020 and H.J. Heinz Finance UK plc's GBP125 million 6.25% notes due Feb. 18, 2030. The notes will be effectively subordinated to the company's present and future first priority indebtedness including the term loans mentioned above and the company's \$2 billion revolver.

The notes will be secured on a second-priority basis by the assets that secure Heinz's guarantors' obligations under the senior secured credit facilities (see Collateral and Covenant section below). The notes are guaranteed by H.J. Heinz Corporation II (Holdings) and wholly owned subsidiaries that guarantee Heinz's obligations under the credit facilities. Covenants are substantially the same as the existing senior secured second lien notes due 2020. The notes contain a change of control provision at 101 plus accrued interest. There is an optional redemption feature. Also there is an equity clawback allowing redemption up to 40% of the notes with proceeds from equity offerings.

KEY RATING DRIVERS
Highly Leveraged after Buyout: The ratings balance Heinz's highly leveraged capital structure after its \$28.75 billion buyout by Berkshire Hathaway Inc. (Berkshire) and 3G Special Situations Fund III, L.P. (3G) on June 7, 2013, with its relatively low business risk as a global packaged food company. Fitch estimates Heinz's leverage (operating EBITDA/total debt with equity credit) has come down substantially from 8.8 times (x) for calendar 2013 to 6.8x for the latest 12 months ended Sept. 28, 2014 pro forma for \$1 billion voluntary repayment of 1st lien term loans and significant EBITDA growth. The company has approximately \$17.6 billion in debt pro forma for this debt reduction (including Fitch's 50% equity credit for \$8 billion preferred stock, see details below).

Strong Owner/Operators: The ratings incorporate significant qualitative benefits from the company's owners both for their financial strength and operating track records. 3G has a proven ability to increase operating profitability substantially and rapidly deleverage acquired firms such as Burger King Worldwide, Inc. and Anheuser Busch InBev NV/SA (Fitch IDR 'A'/Outlook Stable). 3G has already begun to achieve similar results at Heinz in terms of margin expansion and deleveraging. Heinz's adjusted EBITDA is up 32.7% to \$2 billion for the nine months ending Sept. 28, 2014 versus the prior year period due to lower cost of goods sold and sg&a driven by cost savings from productivity initiatives.

Preferred Stock Provides Flexibility: Integrated into the ratings is Fitch's treatment of the \$8 billion 9% cumulative perpetual preferred stock (preferred) held by Berkshire. Fitch classifies 50% of the principal as equity and 50% as debt. Fitch views the flexibility to defer the \$720 million annual dividend as part of its rationale for assigning 50% equity credit and a lever to pull should there be unanticipated deterioration in cash flow and/or liquidity concerns. Fitch does not think deferral is likely in the near term. The preferred dividends are cumulative. Heinz has the ability to call the preferred after three years from issuance, or early 2016.

Growing FCF: FCF (after the preferred dividends and capital expenditures) has swung to approximately \$550 million positive year to date in 2014 and should remain substantial over the next several years as one-time charges dissipate and EBITDA grows at least by a mid-single digit percentage annually as cost savings ramp up. Fitch estimates that FCF was negative by approximately \$450 million for the 2013 calendar year due to significant merger, restructuring, and other nonrecurring cash charges.

Substantial Size and Global Diversification: The ratings incorporate Heinz's product and geographic diversification, as well as its leading market share positions in major product categories. Ketchup and sauces represented 49% of calendar 2013 stub year (eight months) sales while meals and snacks represented 35%, infant nutrition represented 10% and other products comprised the remaining 6%. Heinz generates about two-thirds of its sales outside the U.S., with emerging markets making up approximately 25% of the firm's approximately \$11.3 billion annual revenue. Organic revenue fell 1.4% year to date on 3.3% lower volume partially offset by 1.9% higher pricing. Top line weakness in North America, particularly in frozen meals, and in parts of Europe, remain concerns for Fitch. Weak top line has been impacted by soft category trends in U.S. frozen foods, as well as the company's intentional pruning of lower margin products. Fitch anticipates that top line organic growth should improve beyond the near term, as emerging markets exposure expands and more than offsets sluggishness in developed markets.

Liquidity, Maturities, Covenants, and Collateral:
Ample Liquidity: Liquidity and on-going financial flexibility are expected to remain adequate despite considerably higher leverage post-buyout. Liquidity totaled \$4.9 billion, including Heinz's \$2 billion undrawn revolver and \$2.9 billion in cash and cash equivalents at Sept. 28, 2014. Cash and cash equivalents are down to \$2.3 billion after the fourth quarter 2014 term loan repayment. Fitch believes Heinz will maintain high liquidity.

Improved Maturity Profile: Heinz has improved its maturity profile with this notes issuance and the term loan repayment mentioned above. Heinz is no longer subject to the \$95 million annual term loan amortization since the \$1 billion counted toward the prepayments. Also Heinz is not currently subject to an excess cash flow payment since first lien secured leverage is less than 3.25x. Term loans due in June 2019 and 2020 have decreased from \$9.4 billion to \$6.4 billion. There are also \$3.1 billion 2nd lien notes due Oct. 2020. Approximately \$2.2 billion of pre-LBO debt outstanding primarily consists of long dated maturities of 2028 or beyond. This legacy debt is senior unsecured except for GPB125 million notes due in 2030 at H.J. Finance UK Plc that became 2nd lien secured at the transaction closing.

Collateral and Covenant: Heinz's credit agreement has one financial covenant, which is only tested if more than \$50 million is drawn on the revolver at quarter end. This first lien net leverage ratio nets out up to \$2 billion cash. Fitch estimates ample covenant cushion. 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. 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 includes a second-priority security interest in assets securing the first-priority debt.

RATING SENSITIVITIES

Upgrade Not Anticipated: An upgrade of Heinz's ratings is not anticipated in the near term due to high leverage. However, realization of cost savings, faster-than-anticipated deleveraging, accelerated top-line growth and growing FCF would be viewed positively, making upward migration of the ratings possible in the intermediate term.

Downgrade on Lack of Deleveraging: A negative rating action could occur if deleveraging is materially slower than Fitch expects such that Fitch would anticipate total debt with equity credit (50% equity credit for preferred stock) to operating EBITDA will be materially above 7.5x and further deleveraging is not likely. Prolonged weak organic top line growth or declines, lack of significant margin expansion, or increased debt levels could trigger adverse rating actions. The inability to generate FCF or sustained loss of market share in core product categories would also be viewed negatively.

Fitch currently rates Heinz and its subsidiaries as follows:

H.J. Heinz Holding Corp. (Formerly Hawk Acquisition Holding Corp). (Parent)
--Long-term Issuer Default Rating (IDR) 'BB-'.
H.J. Heinz Co. (Heinz)
--Long-term IDR 'BB-';
--1st lien secured credit facilities 'BB+';
--2nd lien secured notes 'BB';
--Senior unsecured notes 'BB-'.

H.J. Heinz Finance Co.
--Senior unsecured notes 'BB-'.

H.J. Heinz Finance UK Plc.
--2nd lien secured notes 'BB'.

The Rating Outlook is Stable.