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Global Credit Research - 14 May 2010
Approximately GBP275 million of securities affected
London, 14 May 2010 -- Moody's Investors Service today confirmed Enterprise Inns plc ("Enterprise
Inns" or "ETI") Corporate Family Rating (CFR) at B1,
the Probability of Default Rating at B2 and the rating of GBP275 million
senior secured floating-rate notes due 2031 at Ba2 and assigned
a negative outlook. This concludes the review for possible downgrade
commenced 16 February 2010.
The rating has been confirmed following the conclusion of Enterprise Inns'
refinancing of its GBP1 billion bank facility that was due to mature in
May 2011. ETI has now entered into a forward-start facilities
agreement; the total committed principal amount in a year's
time will be GBP625 million. Enterprise Inns intends to reduce
the GBP792 million outstanding at H1 2009/10 under its existing facility
to a level which would leave room for drawings under the revolving portion
of the new facility. It plans to reach that level by applying the
net proceeds of its asset sales programme and free cash flow generation.
While Moody's believes that Enterprise Inns will be able to meet
its target in view of its successful track record of asset sales,
GBP103 million over FY 2008/09 and GBP135 million in H1 09/10, and
of reducing net debt by GBP144 million in FY 2008/09 and by a further
GBP163 million in H1 2009/10 there exists, in our opinion,
considerable execution risk.
The B1 CFR is supported by ETI's active management of a predominantly
good-quality portfolio of freehold public houses. About
half of its cash flow is generated from rental agreements and the other
half is generated from the wholesale profits earned by supplying beer
and other drinks to its tenants under tied leasing arrangements.
The large pub estate provides geographic diversification to revenues that
are underpinned by substantive leases for 86% of the estate.
Nevertheless, due to a challenging operating environment that is
marked by weak consumer spending, ETI's beer sales and net
rental income remain under pressure. While the majority of its
pubs perform well under the circumstances, a minority of pubs face
considerable difficulties. The cost to ETI to support these pubs,
the cost of closed pubs and the impact of disposals resulted in a reduction
of reported consolidated EBITDA (before exceptional items) by 12%
during FY 2008/09 compared to the previous fiscal year and by 9.7%
in H1 2009/10 compared to H1 2008/09.
Our outlook on the rating is negative because we expect ETI's EBITDA
to remain depressed with limited visibility in terms of pace or duration.
This puts pressure on financial covenants that already have limited headroom.
Furthermore, the timely reduction of bank debt carries execution
risk. Free cash flow is insufficient to meet the required reduction
of bank debt down to the forward-start facility amount over the
next 12 months and the success of this refinancing is largely dependent
on the sale of assets.
Given the negative outlook, there is little upside pressure on the
ratings at present. Downward pressure could result from (i) a slowdown
in the pace of asset sales, indicating a heightened risk of ETI
not reaching the forward-start facility amount as agreed with the
banks; (ii) headroom tightening under any of Enterprise Inns'
various financial covenants; (iii) consolidated net debt to EBITDA
trending towards 8.5x or (iv) conversion to REIT status -
although this appears unlikely in the near term.
Moody's last rating action was implemented on 16 February 2010,
when Moody's downgraded Enterprise Inns' CFR to B1 from Ba3 and
placed the rating on review for possible further downgrade.
The principal methodology used in rating Enterprise Inns was the Rating
Methodology for REITs and Other Commercial Property Firms, published
in January 2006 and available on www.moodys.com in the Rating
Methodologies sub-directory under the Research & Ratings tab.
Other methodologies and factors that may have been considered in the process
of rating this issuer can also be found in the Rating Methodologies sub-directory
on Moody's website.
Headquartered in Solihull, Enterprise Inns plc is the second-largest
pub operator in the UK. Enterprise Inns and its wholly-owned
subsidiary Unique Pub Company have a large estate of around 7,100
tenanted pubs in England and Wales with a value of GBP5.2 billion
at the quarter ending 31 March 2010.
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's confirms Enterprise Inns' B1 rating with negative outlook
Paloma San Valentin
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
No Related Data.
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