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Rating Action:

Moody's places Ei Group Plc's ratings under review for downgrade following Stonegate acqusition announcement

22 Jul 2019

London, 22 July 2019 -- Moody's Investors Service (Moody's) has today placed under review for downgrade the B1 corporate family rating (CFR) and the B1 rating of Ei Group Plc's (EIG) GBP275 million senior secured bond due in 2031. The outlook has been changed to Ratings Under Review from Stable.

RATINGS RATIONALE

The review follows the announcement on 18 July 2019 that the boards of directors of EIG and Stonegate Pub Company Bidco Limited, a wholly-owned subsidiary of Stonegate Pub Company Limited (Stonegate, B2 developing outlook) have reached agreement on the terms of a recommended all-cash acquisition of the entire share capital of EIG for approximately GBP1.3 billion. The implied enterprise value of GBP2.97 billion is a multiple of approximately 11.4 times EIG's underlying EBITDA of GBP261 million for the fiscal year 2018 ended on 30 September, adjusted for the disposal of 370 commercial properties.

The acquisition is expected to become effective in the first quarter of 2020, subject to satisfaction of the customary closing conditions and approvals from the relevant authorities. Upon completion of the acquisition, EIG's ratings will be aligned with the rating of Stonegate.

The acquisition price will be financed by a combination of equity to be invested by Stonegate and the TDR Funds, committed financing from the AlbaCore Funds and committed financing from three banks. There was no public disclosure on the debt and equity mix following the acquisition, and therefore leverage in the combined entity is not known and could be higher in the combined entity. EIG's Moody's-adjusted net debt / EBITDA stood at 6.3x for the 12 months to 31 March 2019.

The acquisition will trigger a mandatory redemption of EIG's corporate bonds including the B1 rated GBP275 million senior secured bond due in 2031. Moody's understands that Stonegate has secured sufficient committed facilities to cover the full amount of redemptions.

The review, which Moody's expects to be resolved by Q1 2020, will focus on the combined entity's (1) business profile, strategy, and financial policies (2) leverage and free cash flow; and (iii) whether we rate the combined entity under the Restaurant Industry methodology or the REITs and Other Commercial Real Estate Firms methodology.

STRUCTURAL CONSIDERATIONS

EIG's Corporate Family Rating (CFR) is equal to a senior secured rating given more than 90% of the company's funding is secured. The B1 secured bond rating is in line with the company's B1 CFR.

FACTORS THAT COULD LEAD TO AN UPGRADE

• Higher revenue and operating profits for the company that translates into improved financial metrics, with consolidated Moody's-adjusted net debt/EBITDA towards 6x and fixed charge coverage around 2.5x, both on a sustained basis

• Moody's-adjusted gross debt/total assets towards 50%

• Maintaining good liquidity along with maintaining ample capacity under the company's various financial covenants

FACTORS THAT COULD LEAD TO A DOWNGRADE

• A deterioration in like-for-like (LFL) net income or profitability that exerts pressure on EIG's leverage or fixed charge coverage, such that the company's consolidated net debt/EBITDA rises above 7.5x or its fixed charge coverage falls below 1.75x

• Moody's-adjusted gross debt/total assets is sustained well above 60%

• A weakening of the company's liquidity profile, including any concerns over capacity tightening under any of the various financial covenants

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was REITs and Other Commercial Real Estate Firms published in September 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

PROFILE

EIG is the largest leased and tenanted pub operator in the UK. Together with its wholly owned subsidiary, Unique Pub Company (Unique), the company has a large and geographically diverse GBP3.6 billion estate of more than 4,000 pubs in England and Wales, which generated GBP695 million in annual revenue and GBP287 million in underlying EBITDA in fiscal 2018

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Ramzi Kattan
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Richard Etheridge
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

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

No Related Data.
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