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Related Issuers
Rating Action:

Moody's downgrades the property related UK WBS Notes issued by Punch Taverns Finance plc

03 Mar 2011

Ratings remain on review for further possible downgrade

London, 03 March 2011 -- Moody's Investors Service has today downgraded the following classes of Notes issued by Punch Taverns Finance plc (the "Issuer"; amounts reflect initial outstanding):

GBP175M A1(R), Downgraded to A1 (sf) and Remains On Review for Possible Downgrade; previously on Dec 21, 2010 Aa3 (sf) Placed Under Review for Possible Downgrade

GBP300M A2(R), Downgraded to A1 (sf) and Remains On Review for Possible Downgrade; previously on Dec 21, 2010 Aa3 (sf) Placed Under Review for Possible Downgrade

GBP200M M1, Downgraded to Baa1 (sf) and Remains On Review for Possible Downgrade; previously on Dec 21, 2010 A2 (sf) Placed Under Review for Possible Downgrade

GBP400M M2(N), Downgraded to Baa1 (sf) and Remains On Review for Possible Downgrade; previously on Dec 21, 2010 A2 (sf) Placed Under Review for Possible Downgrade

GBP140M B1, Downgraded to Ba1 (sf) and Remains On Review for Possible Downgrade; previously on Dec 21, 2010 Baa2 (sf) Placed Under Review for Possible Downgrade

GBP150M B2, Downgraded to Ba1 (sf) and Remains On Review for Possible Downgrade; previously on Dec 21, 2010 Baa2 (sf) Placed Under Review for Possible Downgrade

GBP175M B3, Downgraded to Ba1 (sf) and Remains On Review for Possible Downgrade; previously on Dec 21, 2010 Baa2 (sf) Placed Under Review for Possible Downgrade

GBP215M C(R), Downgraded to Ba3 (sf) and Remains On Review for Possible Downgrade; previously on Dec 21, 2010 Ba1 (sf) Placed Under Review for Possible Downgrade

Moody's does not rate the Class D1 Notes issued by Punch Taverns Finance plc. The ratings of the Class A2(R) Notes, Class A3(N) Notes, Class M2(N) Notes and Class B3 Notes 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).

Punch Taverns Finance plc represents a whole-business securitisation (WBS) of a portfolio of 3,147 leased pubs (as of Q4 2010) located across the UK. The transaction closed in March 1998 and has been subject to tap issuances in October 2000, November 2003 and July 2007.

RATINGS RATIONALE

Today's rating action is the result of a detailed review of the transaction performance and Moody's revised expectations with regards to the medium-term cash flow generation ability of the Issuer's pub portfolio relative to the total securitised debt outstanding. Contrary to its analysis approximately one year ago, Moody's expects the portfolio EBITDA, excluding any support from the parent company (Punch Taverns plc), to 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. Hence, the ratings of all classes of Notes have been downgraded to levels that should sustain the lower expected cash flows from the portfolio.

The Notes are kept on review for further possible downgrade pending the strategic review of the parent company, the outcome of which is expected to determine their future actions and/or support towards the securitisation.

Moody's analysis reflects a forward-looking view of the likely range of collateral performance over the medium term. During its ongoing review, Moody's may, if warranted, change these expectations. Performance that falls outside an acceptable range of the key parameters, being the level of the projected EBITDA in comparison with the total outstanding debt, may indicate that the collateral's credit quality is stronger or weaker than Moody's had anticipated during current review. Even so, deviation from the expected range may not necessarily result in a further rating action. There may be mitigating or offsetting factors to an improvement or decline in the performance of the pub portfolio, such as increased subordination levels due prepayments or cash flow support from the parent company in case it decides to continue supporting the securitisation. The current review of the Notes for further downgrade takes into consideration that the parent company may stop the cash flow support to the securitisation; hence, the possibility that an event of default occurs in the transaction which may not be remedied in the best interest of all noteholders.

As highlighted in its press release from 21 December 2010, the TTM EBITDA per pub as of Q4 2010, adjusted to a 364 day period ("normalised") and excluding support from the parent company was GBP 53.9k, down 9.3% from one year before. The total portfolio EBITDA decline was markedly higher at 22% due to the disposal of 512 pubs during FY 2010 (-14%).

During the first three quarters of 2010, the parent company provided a total of GBP 9.4 million EBITDA support to the securitisation. As of end-FY 2010, the debt service coverage ratio (DSCR) for the quarter was 1.45x and for the rolling four quarters was 1.42x. Both ratios are above the default covenant of 1.25x, but below the restricted payment covenant of 1.50x; hence the transaction is currently in cash trapping mode. Moody's understands that the support provided to the securitisation by the parent company targets to keep the DSCR above the default covenant (1.25x) and the appointment of an independent consultant to the Borrower (1.35x). Without the support to the portfolio EBITDA, the DSCR for the quarter would have been 1.38x and for the rolling four quarters would have been 1.34x.

Moody's expectation that the EBITDA per pub in the transaction will further decline by up to 10% is linked to the ongoing stress on the UK pub industry and is specifically based on Moody's projected turnover of the portfolio which is negatively impacted by the lower consumption of beer and declining rental income from the tenants as well the cost pressures in the industry.

The negative effect of the performance deterioration has been partially mitigated by the de-leveraging resulting from Note buy-backs and cancellations to-date. Moody's expects that the sponsor of the transaction will continue to dispose of assets from the underlying portfolio using the disposal proceeds mainly to further reduce the debt in the transaction through loan prepayments as well as repurchase and cancellation of debt. The latest available information on the planned disposals involves an estimated 700 pubs (22% of the portfolio as of Q4 2010) which the parent company has identified as part of its non-core, non-value adding assets over the long-term.

Debt buy-backs and cancellations are generally viewed as beneficial for the remaining outstanding Notes if the structure effectively de-leverages, i.e. if the outstanding debt reduces faster than the portfolio cash flow. Future debt repurchase will depend on the availability and purchase prices of the Notes in the secondary market, as well as any further expenses including hedging breakage costs. Moody's has not given benefit to an effective deleveraging of the portfolio and will closely monitor the progress on the planned disposals.

Moody's full assessment of the transaction and a potential adjustment to the ratings currently depend on the strategy of the parent company, in particular its commitment to supporting the cash flows from the portfolio. In Moody's view, there is a likelihood that the parent company may choose not to support the transaction following the strategic review of its business. Should the EBITDA support be removed , Moody's expects the default trigger in the transaction to be breached in the near term. In such a case, Moody's ratings will increasingly focus on (i) a scenario of an alternative operator running the portfolio, (ii) the availability of portfolio cash flows and the liquidity facility to service the debt, and (iii) the real estate value that can be unlocked from the underlying portfolio. To date, Moody's has not been approached by the transaction parties as regard the future strategy of the sponsor and/or the expected performance of the subject transaction.

RATING METHODOLOGY

The principal methodology used in this rating 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 rating action is a result of Moody's on-going surveillance of commercial mortgage backed securities (CMBS) transactions. The Notes were placed on review for possible downgrade on 21 December 2010. The last Performance Overview for this transaction was published on 14 February 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).

REGULATORY DISCLOSURES

The rating has 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 and public information.

Moody's Investors Service considers the quality of information available on the issuer or obligation 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

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 downgrades the property related UK WBS Notes issued by Punch Taverns Finance plc
No Related Data.
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