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