GBP 2,495 million of property related UK WBS affected (original amount GBP 3,224 million)
London, 05 April 2011 -- Moody's Investors Service has downgraded the ratings of notes issued by
Punch Taverns Finance plc ("Punch A") and Punch Taverns Finance
B Limited ("Punch B").
Today's rating actions are as follows:
Issuer: Punch Taverns Finance plc
GBP270M A1(R) Notes, Downgraded to Baa1 (sf); previously on
Mar 3, 2011 Downgraded to A1 (sf) and Remained On Review for Possible
Downgrade
GBP300M A2(R) Notes, Downgraded to Baa1 (sf); previously on
Mar 3, 2011 Downgraded to A1 (sf) and Remained On Review for Possible
Downgrade
GBP200M M1 Notes, Downgraded to Ba1 (sf); previously on Mar
3, 2011 Downgraded to Baa1 (sf) and Remained On Review for Possible
Downgrade
GBP400M M2(N) Notes, Downgraded to Ba1 (sf); previously on
Mar 3, 2011 Downgraded to Baa1 (sf) and Remained On Review for Possible
Downgrade
GBP140M B1 Notes, Downgraded to Ba3 (sf); previously on Mar
3, 2011 Downgraded to Ba1 (sf) and Remained On Review for Possible
Downgrade
GBP150M B2 Notes, Downgraded to Ba3 (sf); previously on Mar
3, 2011 Downgraded to Ba1 (sf) and Remained On Review for Possible
Downgrade
GBP175M B3 Notes, Downgraded to Ba3 (sf); previously on Mar
3, 2011 Downgraded to Ba1 (sf) and Remained On Review for Possible
Downgrade
GBP215M C(R) Notes, Downgraded to B3 (sf); previously on Mar
3, 2011 Downgraded to Ba3 (sf) and Remained On Review for Possible
Downgrade
Issuer: Punch Taverns Finance B Limited
GBP201M A3 Notes, Downgraded to Baa3 (sf); previously on Mar
3, 2011 Downgraded to Baa1 (sf) and Remained On Review for Possible
Downgrade
GBP220M A6 Notes, Downgraded to Baa3 (sf); previously on Mar
3, 2011 Downgraded to Baa1 (sf) and Remained On Review for Possible
Downgrade
GBP250M A7 Notes, Downgraded to Baa3 (sf); previously on Mar
3, 2011 Downgraded to Baa1 (sf) and Remained On Review for Possible
Downgrade
GBP250M A8 Notes, Downgraded to Baa3 (sf); previously on Mar
3, 2011 Downgraded to Baa1 (sf) and Remained On Review for Possible
Downgrade
GBP77.5M B1 Notes, Downgraded to Ba3 (sf); previously
on Mar 3, 2011 Downgraded to Ba1 (sf) and Remained On Review for
Possible Downgrade
GBP125M B2 Notes, Downgraded to Ba3 (sf); previously on Mar
3, 2011 Downgraded to Ba1 (sf) and Remained On Review for Possible
Downgrade
GBP125M C1 Notes, Downgraded to B3 (sf); previously on Mar
3, 2011 Downgraded to B1 (sf) and Remained On Review for Possible
Downgrade
Moody's does not rate the Class D1 Notes issued by Punch A. The
ratings of the Class A2(R) Notes, Class M2(N) Notes and Class B3
Notes of Punch A are based on the underlying rating of the notes and are
no longer based on the financial guarantee policy provided by AMBAC Assurance
UK Limited (Caa2). The ratings of the Class A7 and Class A8 Notes
of Punch B are based on the underlying rating of the notes and are no
longer based on the financial guarantee insurance policy issued by MBIA
UK Insurance Limited (B3).
Punch A and Punch B represent whole-business securitisations (WBS)
of a portfolio of 3,147 and 2,178 leased pubs (as of Q4 2010)
respectively, located across the UK. Punch A closed in March
1998 and has been subject to tap issuances in October 2000, November
2003 and July 2007 whereas Punch B closed in November 2002 and was restructured
in August 2005.
RATINGS RATIONALE
Today's rating actions are driven by a re-assessment of the
operations of the borrowers together with their ultimate parent company
(Punch Taverns plc) and lower values Moody's attributes to the underlying
pub portfolios which serve as security for the noteholders. Moody's
based its analysis on (i) its view of the long-term sustainability
of the borrowers' assets and the cash flows generated from them
which have been on a declining trend for the past three years and (ii)
the intrinsic credit quality of the pub operator. Moody's
previously downgraded all classes of notes on 3 March 2011 and maintained
the review of the notes for possible downgrade pending the results of
the strategic review within the parent company. Today's rating
actions conclude the review of the ratings which was initiated in December
2010.
Primary sources of assumption uncertainty in relation to today's
rating actions are (a) the current stressed macro-economic environment
and (b) the viability of the UK pub industry which drive the operations
of the borrowers in both transactions. Moody's assessment
of these whole business securitisations relies on the structural and legal
integrity of the transactions; in particular its assumption that
the borrowers could be replaced by alternative operators in case of insolvency
or default under their obligations. A deviation from this scenario
whereby the assets and businesses of the borrowers would be liquidated
in a shorter term or any other amendments to the current structures which
would result in a change of the economic benefit to the noteholders will
require Moody's to review its rating of the notes.
On 22 March 2011, the parent company 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 Punch 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, and
(iii) There are limited synergies between the leased and managed operations,
and Punch Group's existing structure is a barrier to realising value
in the respective portfolios.
Consequently, the parent company announced the demerger of its leased
and managed businesses. Post the de-merger which is expected
to be completed in summer 2011, the securitisation groups of Punch
A and Punch B should fall within a new independent company that will focus
on running the leased pubs. The new company should also include
the parent's joint venture interest in Matthew Clark, a drinks
wholesaling and distribution business. The approximately GBP 270
million cash resources of Punch Taverns plc is proposed to be split roughly
evenly between the managed and leased business after covering for the
de-merger costs estimated at GBP 30 million. The significant
downsizing in respect of the leased portfolio involves the disposal of
approximately 2,200 pubs across the Punch A and Punch B portfolios.
As highlighted in our press releases from March 2011, during the
first three quarters of 2010, the parent company provided a total
of GBP 9.4 million and GBP 20.9 million EBITDA support to
Punch A and Punch B, respectively. According to the parent
company, the total cost of supporting the securitisations should
be approximately GBP 45 million per annum. Without the support
to the portfolio EBITDA, the debt service coverage ratio (DSCR)
for the quarter ended in Q4 2010 would have been 1.38x and for
the rolling four quarters would have been 1.34x for Punch A whilst
the same ratios would have been 1.09x and 1.28x respectively
for Punch B. Therefore, in both transactions, the DSCRs
have been above the default covenant (1.25x) and the appointment
of an independent consultant to the borrower (1.35x).
Moody's expects that the cash flows from the portfolios will decline
further in 2011, by up to 10% from the trailing twelve month
(TTM) EBITDA as of Q4 2010 and stabilise only during the course of 2012.
As such, Moody's expects that an event of default would materialise
under the Issuer-Borrower loan agreement in each of the transactions
if the new parent company stopped its support. In case of a breach
of the financial covenants in the documents, the borrowers would
have 30 days to cure the breach which essentially include the injection
of some form of equity or another remedial action which the Security Trustee
determines will not be materially prejudicial to the interests of the
noteholders, and in case of Punch A, the consent of Ambac
is obtained. Breach of the financial covenants which are not cured
in the grace period would result in an event of default, permitting
the Security Trustee to serve a borrower enforcement notice and enforce
the securitisation groups' security in respect of any Obligor by
the appointment of an administrative receiver.
In both transactions, the borrowers can request a change to the
covenants including the financial covenants. According to the transaction
documents, the Security Trustee and Note Trustee may agree to the
modification, disapplication, amendment or waiver of a covenant
(if, in certain circumstances, for Punch A, the consent
of Ambac is obtained), and each of the Security Trustee and the
Note Trustee are of the opinion that the interests of the Issuer Secured
Creditors, including the noteholders, will not be materially
prejudiced. In light of the size of the future planned disposals,
Moody's understands that a change to the permitted disposal covenants
in the transactions may be necessary. In its announcement on 22
March, the parent company has stated that it intends to continue
supporting the securitisations until future dialogue with bondholders
take place; however, no indication on timing was provided.
The current adverse cash flow profiles of the pub portfolios combined
with a fundamental assessment of the credit strength of the pub operator,
which Moody's believes will weaken after the de-merger,
has resulted in Moody's putting an increased weight on the leverage
of the notes when adjusting its ratings. In Moody's opinion,
the current value of the pub portfolio in Punch A is approximately GBP
1.6 billion and in Punch B is GBP 998 million. Moody's
values are approximately 23% lower than the respective book value
of the portfolios (per Q4 2010) and take into account the increased size
of the non-core part of the estate. The downward adjustment
to the portfolio values reflects Moody's expectation of further
cash flows declines and the overall state of the UK pub sector for which
Moody's has a negative outlook.
The downgrade of all notes today takes into account the leverage of the
notes including the senior ranking swap mark-to-market exposures
associated with the floating rate notes in the transactions. With
respect to the senior notes in Punch A, the rating incorporates
the uncertainty over how the disposal proceeds will be utilised as the
borrower has the flexibility to prepay debt or repurchase notes without
any particular seniority across the capital structure as long as the DSCR
is above 1.35x. In its analysis Moody's has not given benefit
to effective deleveraging of the portfolios from the planned disposals
and will closely monitor the progress on the disposals and any future
amendments to the transaction covenants.
Moody's notes that in both transactions, an external liquidity
facility is available to cover for shortfall on interest and principal
due under the notes, subject to specific limits on different tranches.
Thus, an imminent event of default caused by a non-payment
is currently not expected by Moody's. The liquidity facilities
would also be available to provide funds in a scenario whereby an alternative
operator would step in and there would be temporary disruptions to operations
and cash flows generated from the portfolios. As per the latest
interest payment date on the notes, the available commitment under
the liquidity facility in Punch A was GBP 294 million while it was GBP
168 million in Punch B.
In a separate press release today, Moody's commented on its
view of the de-merger as it relates to Spirit Issuer plc,
the transaction which securitises the managed pubs.
RATING METHODOLOGY
The principal methodology used in these ratings was "Moody's Approach
to UK Whole Business Securitisations" published in October 2000.
In this approach, a sustainable annual free cash flow is derived
over the medium to long term horizon of the transaction, and then
multipliers are applied to such cash flows in order to reach the 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.
The Notes were placed on review for possible downgrade on 21 December
2010 and were previously downgraded on 3 March 2011. The last Performance
Overview for the transactions were published on 14 February 2011.
Please see the ratings tab on the issuer / entity page on moodys.com
for the last rating actions and the ratings history.
For updated monitoring information, please contact [email protected]
To obtain copies of Moody's New Issue Reports on the transactions,
please visit Moody's website at www.moodys.com or contact
our Client Service Desk in London (+44-20-7772 5454).
REGULATORY DISCLOSURES
The ratings have been disclosed to the rated entity or its designated
agents and issued with no amendment resulting from that disclosure.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information and confidential and proprietary Moody's Investors
Service information.
Moody's Investors Service considers the quality of information available
on the issuers or obligations satisfactory for the purposes of maintaining
a credit rating.
Moody's Investors Service may have provided Ancillary or Other Permissible
Service(s) to the rated entity or its related third parties within the
three years preceding the Credit Rating Action. Please see the
ratings disclosure page www.moodys.com/disclosures on our
website for further information.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
London
Deniz Yegenaga
Analyst
Structured Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Frankfurt am Main
Marie-Jeanne Kerschkamp
MD - EMEA Structured Fin
Structured Finance Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's Investors Service Ltd.
One Canada Square
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JOURNALISTS: 44 20 7772 5456
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Moody's downgrades the UK WBS Notes issued by Punch Taverns Finance plc and Punch Taverns Finance B Limited
