Fitch downgrades Punch Taverns Finance
Global rating agency Fitch has downgraded Punch Taverns Finance Plc's (Punch A) notes. The Outlooks on the class A and M notes are Negative.
The downgrades are driven by a combination of further declines in business performance, limited scope for operational change and Fitch's expectation that without a material improvement in business prospects, the B, C and D notes are in danger of ultimately defaulting. These issues are compounded by ineffective financial covenants.
The Negative Outlook reflects the agency's view that Punch A's performance remains challenged by macro-economic factors such as the uncertainty about the jobs' market, rising commodity prices, the ongoing change in consumer behaviour especially affecting wet-led pubs, further exposure to alcohol taxation and the continued strength of the off-trade.
The transaction's performance has continued to deteriorate, as evidenced by the decline in operating profit and resulting coverage (rolling two quarter EBITDA DSCR down to 1.36x (unsupported 1.07x vs. 1.17x a year ago, compared with a financial covenant of 1.25x)). Performance has not yet levelled out, as indicated by like-for-like net income from Punch Taverns Plc's (Plc) core estate, which is a good proxy for Punch A's core estate, dropping by 3.7% (vs. 2.1% in FY11). However, this is mainly driven by pubs not held on substantive agreements (6% of Plc's core and 45% of Plc's turnaround estate).
EBITDA per pub has remained largely flat over the past four quarters. This was heavily influenced by the borrower's disposal programme, which focuses on selling poorly performing pubs from Punch's turnaround estate. The agency expects that continued pressure, on both revenues with notably the ongoing rebasing of the rent charged to the tenants and costs with rising food, utilities, and maintenance costs, should continue to curtail EBITDA.
Further asset disposals and potential debt prepayments could have a material impact on the assumptions and DSCRs. Additionally, with regards to the forecast of FCF (after-tax), Fitch understands that the interest expense incurred due to the subordinated loan funding (GBP1,023m) is fully tax deductible and is therefore functioning as an efficient taxshield.