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Announcement:

Moody's comments on the announced demerger of Spirit from Punch

05 Apr 2011

London, 05 April 2011 -- Moody's Investors Service has commented today on the announced demerger of the Spirit Group from parent Punch Taverns plc and the creation of a new listed parent company, Spirit plc. Moody's is currently rating all classes of Notes issued by Spirit Issuer plc Ba2(sf) (see www.moodys.com for more details).

1) Spirit's Demerger

On 22 March 2011, parent company Punch Taverns plc announced the results of the Punch Group's strategic review that started in October 2010. The main conclusions of the operating performance and capital structure review are as follows:

(i) The Group's current strategy is not sustainable and restructuring appears necessary;

(ii) The two main activities of the Punch Group, the leased business and the managed business, are now presenting very different investment prospects to shareholders. The managed portfolio requires capital investment to sustain growth, whereas the leased portfolio needs repositioning through downsizing of more than 40% of the estate, in number of units;

(iii) There are limited synergies between the leased and managed operations, and the Group's existing structure is a barrier to realising value in the respective portfolios;

Consequently, the Group announced the demerger of Spirit from Punch and the creation of a new independent public company, Spirit plc. The demerger is planned to complete by September this year. Spirit plc is expected to own Spirit's existing securitisation vehicle in its current shape, including the managed and leased estates, as well as half the cash at Group level post demerger costs and some extra leasehold pubs that are currently held outside the securitisations.

Additionally, about 100 to 150 of the leased pubs currently securitised in Spirit will be converted back to managed pubs. The rest of the current leased estate in Spirit, between 400 and 450 units, is deemed non-core and should be disposed in the medium term. Beyond 5% in number of units and value, the disposal of the non-core leased pubs is subject to certain Opflex DSCR (1.65x) and LTV (60%) criteria. The proceeds of the disposals are expected to be used to fund capital expenditures or possibly up-streamed as dividend to shareholders, assuming debt coverage is sufficient to allow payments outside the securitisation.

At this stage, Moody's does not expect the demerger to represent a significant incremental risk for the ratings of the Notes issued by Spirit Issuer plc, for a number of reasons, amongst which:

(i) Preliminary results for Q2 2011 seem to confirm the trend towards improvement of the performance on the managed side, with like-for-like sales up 8.6%. In turn, improving performance should incentivise investment in the managed estate;

(ii) As currently planned, the demerger would grant half of the cash or cash equivalent held at Group level to Spirit, or about GBP120M, which can fund appropriate levels of capital expenditure for the estate;

(iii) The property disposal and restricted payment covenants mentioned above imply that some improvement from the current debt service coverage will have to be achieved before a significant part of the non-core estate can be sold or cash from the securitisation can be up-streamed, at least until 2014; and

(iv) As per Moody's analysis, the Debt-to-FCF and Note-to-Value ratios are consistent with the current ratings of the Notes.

However, the prospects of the managed pub business remain uncertain, and some details of the planned demerger will need to be confirmed. The following factors may have an adverse impact on the ratings and will be carefully monitored by Moody's:

(i) Whether margins may deteriorate as a consequence of the demerger, possibly as a result of a loss of pricing power, a loss of supply agreement negotiation power, or comparatively higher central costs;

(ii) The exact composition and incentivisation of the Spirit plc management team;

(iii) The position of monoliner Ambac as guarantor of some of the Notes issued by Spirit Issuer plc, but also of some of the Notes in Punch Taverns Finance plc ("Punch A"). Some form of consent from Ambac is understood to be required to complete the demerger;

(iv) Whether the 400 to 450 leased pubs that are not expected to be converted back to managed pubs may be successfully sold, and how disposal proceeds will be applied; and

(v) Whether the performance of the managed estate will continue to improve, or may resume its earlier downward trend.

In a separate press release issued today, Moody's took rating actions and commented on the impact of the de-merger on the ratings of the Notes in Punch Taverns Finance plc and Punch Taverns Finance B Limited, the two leased pubs securitisations in Punch Tavern plc.

2) Transaction Overview and Current Performance

Spirit Issuer plc represents a whole-business securitisation of a portfolio of 658 managed pubs and 564 leased pubs, as of Q4 2010. The pubs are located across the UK. The transaction closed in November 2004 and was restructured in June 2006.

Since restructuring of the transaction in 2006 and to Q4 2010, the trailing twelve months FCF from the leased and managed estates decreased from GBP185.1M to GBP113.6M, a drop of 39%. Over the same period, the total number of pubs in the portfolio decreased by 9%, and the amount of Notes outstanding decreased by 27%, mostly as a result of Notes being purchased on the open market and cancelled. As of Q4 2010, the DSCR (Opflex), at 1.57x, was still below the trigger level of 1.70x, thus preventing cash upstreaming.

For further details on the recent performance of the transaction, please refer to the Performance Overview published on 8 March 2011 on Moody's website at www.moodys.com

3) Rating Methodology

The principal methodology used in this rating was "Moody's Approach to UK Whole Business Securitisations" published in October 2000. As per this methodology, a sustainable transaction free cash flow is estimated over the medium to long term horizon of the transaction, and multipliers are applied to such cash flows to derive the quantum of debt which could be issued at the targeted long-term rating level for the Notes.

Moody's Investors Service did not receive or take into account a third party due diligence report on the underlying assets or financial instruments related to the monitoring of this transaction in the past six months.

This comment is issued in the context of Moody's on-going surveillance of commercial mortgage backed securities (CMBS) and whole business securitisation (WBS) transactions. The ratings of the Notes were last affirmed on 13 November 2009. The most recent Performance Overview for this transaction was published on 8 March 2011. Please see the ratings tab on the issuer / entity page on moodys.com for the last rating action and the ratings history.

For updated monitoring information, please contact monitor.cmbs@moodys.com. To obtain a copy of Moody's New Issue Report on this transaction, please visit Moody's website at www.moodys.com or contact our Client Service Desk in London (+44-20-7772 5454).

London
Thomas Babin
Analyst
Structured Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Christophe de Noaillat
Senior Vice President
Structured Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's comments on the announced demerger of Spirit from Punch
No Related Data.
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