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Fitch Downgrades Heinz to 'BB-' & Rates Proposed Debt; Outlook Stable

  Fitch Downgrades Heinz to 'BB-' & Rates Proposed Debt; Outlook Stable

Business Wire

CHICAGO -- March 12, 2013

Fitch Ratings has resolved the Rating Watch Negative placed on H.J. Heinz
Company (Heinz) and its subsidiaries on Feb. 15, 2013 following the Berkshire
Hathaway, Inc. (Berkshire) and 3G Partners Ltd. (3G) buyout announcement. The
transaction is valued at $28 billion, including the assumption of $5.3 billion
of debt including hedge accounting adjustments at Jan. 27, 2013, and
represents roughly 13.0x Heinz's LTM EBITDA of $2.2 billion. The buyout is
expected to close in the third quarter of 2013, subject to shareholder and
regulatory approval. The financing terms and expected capital structure have
been reviewed.

On the assumption that the buyout will occur, Fitch has downgraded the
long-term ratings of H.J. Heinz Company (Heinz) and its subsidiaries and
revised the Rating Outlook to Stable.

Fitch has downgraded the following ratings:

H.J. Heinz Co.

--Long-term Issuer Default Rating (IDR) to 'BB-' from 'BB+';

--Senior unsecured notes to 'BB-' from 'BB+'.

H.J. Heinz Finance Co.

--Long-term IDR to 'BB-' from 'BB+';

--Senior unsecured notes to 'BB-' from 'BB+'.

H.J. Heinz Finance UK Plc.

--Long-term IDR to 'BB-' from 'BB+';

--Senior unsecured notes 'BB-' from 'BB+'.

Fitch has affirmed the following ratings:

H.J. Heinz Co

--Short-term IDR at 'B';

--Commercial paper (CP) at 'B';

--Bank facilities at 'BB+'.

H.J. Heinz Finance Co.

--Short-term IDR at 'B';

--CP at 'B';

--Bank facilities at 'BB+' (as co-borrower);

--Series B Preferred Stock at 'BB-'.

Fitch has concurrently assigned the following ratings to the proposed debt
used to finance the buyout by Berkshire and 3G:

Hawk Acquisition Sub., Inc. (to be merged into H.J. Heinz Co. at closing)

--Secured credit facility 'BB+';

--2nd lien notes 'BB'.

Hawk Acquisition Holding Corp. (Parent)

--Long-term IDR 'BB-'.

Fitch expects to withdraw the following ratings on existing facilities upon
closing of the transaction:

H.J. Heinz Co.

--Bank facilities 'BB+';

--Commercial paper (CP) 'B'.

H.J. Heinz Finance Co.

--Bank facilities 'BB+' (as co-borrower).

--CP 'B';

--Series B Preferred Stock 'BB-'.

Financing for the buyout includes $4.12 billion of common equity from 3G and
$12.12 billion of equity, inclusive of $8 billion of preferred equity with
warrants, from Berkshire. Additionally, Hawk Acquisition Sub., Inc. (Hawk)
intends to issue $10.5 billion of first-priority term loans due 2019 and 2020
along with a $1.5 billion first-priority revolver. Hawk also plans to issue
$2.1 billion of long-term second-lien notes at or prior to transaction close
or enter into a second-lien bridge facility of up to $2.1 billion to the
extent such notes are not issued.

Key Rating Drivers:

The rating actions balance Heinz's highly leveraged capital structure post
buyout 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 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. 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 to be 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 the existence of incentives to issue
common equity reduces the company's overall financial risk. Pro forma total
debt adjusted for the equity treatment of these hybrid securities will
approximate $17 billion and total debt with equity credit-to-operating EBITDA
will exceed 7.0x, up from roughly $5 billion and 2.4x, respectively for the
LTM period ended Jan. 27, 2013. Nonetheless, Fitch anticipates that total debt
with equity credit-to-operating EBITDA can decline to below 6.0x within two
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 represented 11%, and other products represented 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% due
to 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 is expected to remain adequate despite considerable debt levels
following the buyout. Heinz will maintain a $1.5 billion five-year 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 preferred
dividend as being a potential lever 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 also
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 limited in the intermediate term, eliminating refinancing
risk should market conditions worsen. Debt incurred for the transaction is
expected to have maturities five to seven years out. Financial covenants are
expected to be minimal for the newly issued debt. Existing debt that will not
be refinanced as part of this transaction (roll over notes) are long dated and
are not likely to be due until 2028, 2030, 2032 and 2039.

In terms of collateral, the first-priority debt will be 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 plant 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 generations 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'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.

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

Applicable Criteria and Related Research

Corporate Rating Methodology

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

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

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

Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers

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

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Contact:

Fitch Ratings
Primary Analyst
Carla Norfleet Taylor, CFA
Director
+1-312-368-3195
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Grace Barnett
Director
+1-212-908-0718
or
Committee Chairperson
Mark Oline
Managing Director
+1-312-368-2073
or
Brian Bertsch, +1-212-908-0549 (New York)
brian.bertsch@fitchratings.com