Fitch downgrades Punch Tav­erns Fi­nance

The Pak Banker - - Front Page -


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.

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