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I AGREE
21 Dec 2010
GBP 2,100 million of WBS/Property affected
London, 21 December 2010 -- Moody's Investors Service has today placed on review for possible downgrade
the following classes of Notes issued by Punch Taverns Finance plc (the
"Issuer") (amounts reflecting initial outstanding):
GBP270M A1(R), Aa3 (sf) Placed Under Review for Possible Downgrade;
previously on Jun 14, 2007 Upgraded to Aa3 (sf)
GBP300M A2(R), Aa3 (sf) Placed Under Review for Possible Downgrade;
previously on Jun 19, 2008 Downgraded to Aa3 (sf)
GBP200M M1, A2 (sf) Placed Under Review for Possible Downgrade;
previously on Mar 11, 2010 Downgraded to A2 (sf)
GBP400M M2(N), A2 (sf) Placed Under Review for Possible Downgrade;
previously on Mar 11, 2010 Downgraded to A2 (sf)
GBP140M B1, Baa2 (sf) Placed Under Review for Possible Downgrade;
previously on Mar 11, 2010 Downgraded to Baa2 (sf)
GBP150M B2, Baa2 (sf) Placed Under Review for Possible Downgrade;
previously on Mar 11, 2010 Downgraded to Baa2 (sf)
GBP175M B3, Baa2 (sf) Placed Under Review for Possible Downgrade;
previously on Mar 11, 2010 Downgraded to Baa2 (sf)
GBP215M C(R) Certificate, Ba1 (sf) Placed Under Review for Possible
Downgrade; previously on Mar 11, 2010 Downgraded to Ba1 (sf)
Moody's does not rate the Class D1 Notes issued by Punch Taverns Finance
plc. The rating of the Class A3(N) Notes was withdrawn on 17 March
2010 due to full redemption of the notes. All the ratings of the
Issuer are (sf) ratings.
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
of a portfolio of 3,147 (as of Q4 2010) leased pubs 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.
Rating Rationale
The rating action today has been prompted by Moody's anticipation
that the cash flows generated by the Borrower's pub portfolio will continue
to exhibit the negative trend witnessed over the last two years and decline
below Moody's expectations from its last review in March 2010.
Consequently, debt to free cash flow multiples are expected to rise
above sustainable levels for each of the rating categories outstanding
in the transaction.
In FY 2010, the EBITDA per pub, adjusted to a 364 day period
("normalised") and excluding support from the parent company (Punch Taverns
plc) declined by 9.3% to GBP 53.9k from GBP 59.5k
one year ago. During the first three quarters of 2010, the
parent company provided a total of GBP 9.4 million EBITDA support
to the securitisation. While the exact areas of support are not
disclosed by the parent company, Moody's understands that
the support has been in three main forms: (i) offer of beer at discounted
prices by the parent company to the securitisation resulting in increased
beer margins; (ii) reduction of overhead expenses (e.g.
management fees), and (iii) purchase of notes by the parent company
from the secondary market to be sold to the Borrower at discounts,
to be in turn cancelled by the Issuer.
There has been a considerable amount of pub disposals from the portfolio
whereby 14% of the portfolio (512 pubs) was sold since end-FY2009
until end-FY 2010. The debt outstanding decreased as well,
by GBP 260.5 million to GBP 1,689 million; however,
at a slower pace than that of the total portfolio EBITDA decline during
FY 2010.
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).
According to the parent company, the total cost of supporting the
subject securitisation and a similar securitisation, Punch Taverns
Finance B Limited, should be approximately GBP 45 million per annum.
While the decline in portfolio cash flows has been in line with Moody's
expectations for FY 2010, Moody's is cautious with respect
to the future performance of the UK pub sector and the level of cash flows
to be generated from the securitised portfolio in the medium term.
In more detail, Moody's expects cash flows to further decline
in FY 2011 due to depressed sales, declining rental income from
tenants and cost pressures in the industry. In its analysis,
Moody's disregards the support provided by the parent company and
looks to the true cash flow generation ability of the pub portfolio.
Moody's notes that in the absence of EBITDA support from the parent,
it is probable that the DSCR covenant of 1.25x will be breached
during the course of 2011.
During its review, Moody's will revise its expectation of
future cash flows from the portfolio by factoring into its analysis industry
wide stresses, be it in the form of changing beer consumption habits,
increasing operating costs or potentially weaker consumer confidence in
the UK. Additionally Moody's will take into consideration (i) the
performance of the portfolio since end-FY 2010, (ii) the
level and use of cash trapped in the securitisation, and (iii) the
reduction of the debt through scheduled amortisation as well as repayments
following future pub disposals.
Moody's will also assess and incorporate into its analysis (i) the
outcome of the strategic review currently being conducted at the parent
company (expected to be disclosed during the first quarter of 2011) which
should provide clarity on the parent company's commitment to supporting
the securitisation and (ii) the impact of further pub disposals in the
next two to four years which is expected to be in the range of 700 pubs
(22% of current portfolio) that the parent company has identified
to be a part of its non-core, non-value adding assets
over the long-term.
Moody's initially analysed and monitors this transaction using its rating
approach for whole business transactions. 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.
The rating action is a result of Moody's on-going surveillance
of commercial mortgage backed securities (CMBS) transactions. The
previous transaction review and rating action on the Class M1, M2(N),
B1, B2, B3 and C(R) Notes is summarised in a Press Release
dated 11 March 2010. The last Performance Overview for this transaction
was published on 21 June 2010. Please see the ratings tab on the
issuer / entity page on moodys.com for the last rating action and
the ratings history. In addition, Moody's publishes a weekly
summary of structured finance credit, ratings and methodologies,
available to all registered users of our web site, at www.moodys.com/SFQuickCheck.
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).
London
Deniz Yegenaga
Analyst
Structured Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
New York
Andrea M. Daniels
VP - Senior Credit Officer
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
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 places property related UK WBS Notes issued by Punch Taverns Finance plc on review for possible downgrade
No Related Data.
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