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Rating Action:

Moody's upgrades rating of bond issued by Spirit Issuer plc

25 Apr 2022

Moody's also affirms the counterparty instrument rating on the Liquidity Facility Agreement. Approximately GBP 111.7M of CMBS Affected

London, April 25, 2022 -- Moody's Investors Service, ("Moody's") has today upgraded the rating of one class of Bond issued by Spirit Issuer plc ("Spirit", the Issuer).

....GBP161.2M (current outstanding balance GBP96.7M) Fixed/Floating Rate Class A5 Secured Debenture Bonds due 2034, Upgraded to Baa3 (sf); previously on May 26, 2017 Affirmed Ba1 (sf)

Moody's has also affirmed the counterparty instrument rating on the transaction's Liquidity Facility Agreement:

....GBP194M (current outstanding balance GBP15M) Liquidity Facility Agreement Notes, Affirmed Aa3 (sf); previously on May 26, 2017 Affirmed Aa3 (sf)

RATINGS RATIONALE

Today's upgrade rating action reflects the combination of the deleveraging of the Spirit transaction through repayment of the A2 Bonds in March 2020 and the more recent February 2022 removal in the UK of all remaining emergency Covid laws and positive trends in pub trading performance. The easing of Covid restrictions through the course of 2021/22 has allowed a gradual recovery in a number of key credit drivers for the deal, such as Free Cash Flow (FCF) and Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA). Moody's expectation is for a continuing improvement in these metrics over the first half of 2022 and for the transaction to return to full compliance with its covenants by the end of this period.

Subsequent to the March 2020 deleveraging, the Class A5 Bond is the only outstanding bond of the Issuer. The GBP 96.7M outstanding amount is supported by cashflows arising on a current estate of 300 managed and 217 leased pubs which in the 13 weeks ending 2 January 2022 [1] generated a total turnover of GBP 79.6M for a periodic EBITDA of GBP 11.9M. The A5 Bonds have no scheduled amortization due until 2029 and periodic debt service is approximately GBP 1.3M per quarter. Reported pub values [1], which provide an ultimate backstop to the issued bonds, have remained resilient despite Covid and Moody's Note-to-Value (NTV) ratios are robust when compared to the quantum of outstanding debt.

The performance of the transaction over the last 24 months has been severely impacted by Covid and in fact the transaction remains in a state of technical default due to unremedied breaches of financial covenants. A bondholder waiver of the various Events of Default was sought but not obtained. The bonds have not been accelerated and the performance of the transaction in recent months has improved as Covid-restrictions have been removed.

As part of its analysis, Moody's reviewed the quarterly Financial Reports [2] for Spirit Issuer and the Annual Report and Financial Statements for Spirit Issuer plc [3] and Greene King Limited [4]. Moody's notes that Greene King's liquidity position has been reinforced by the provision to Greene King of a GBP 1.5bn revolving loan facility by an indirect intermediate parent company (CKA Holdings UK Limited); and Spirit Issuer plc has benefited from a subordinated loan for an amount of up to GBP 100M issued by Spirit Managed Funding Limited to fund working capital requirements as a result of the COVID-19 pandemic. Moody's understands that both facilities have not been fully drawn and with respect to the GBP 100M subordinated loan, only GBP 3M has been drawn down on this loan since inception.

Moody's also took comfort from statements made in the Annual Report and Financial Statements by the directors of Greene King Limited [4] regarding the "highly improbable" likelihood of enforcement actions on the Spirit debenture following the state of technical default of the Spirit debenture; and statements from the directors of Greene King Limited [4] and Spirit [3] regarding the "going concern" nature of the companies, on which the auditors agree.

The affirmation rating action on the Liquidity Facility Agreement reflects the quality of the pub collateral underlying the transaction and the transaction's structure, including the senior position of the liquidity facility in the Issuer's payment waterfall.

Moody's notes that Spirit did not make any draws on the Liquidity Facility Agreement since Covid-related restrictions were introduced in the UK in March 2020. Cashflow support to the Issuer has come from Greene King, who in turn have been supported by their ultimate owner CK Asset Holdings Limited (A2, stable).

The key parameters in Moody's analysis are: (i) the intrinsic credit strength of the borrower and the Sponsor group; (ii) the sustainable FCF debt multiples generated by the underlying property portfolio and operations over the medium to long term horizon of the transaction; and (iii) the structural protections available to the noteholders aimed at limiting the sensitivity of the credit quality of the notes from the underlying credit quality of the borrower and its operations.

For the Counterparty Instrument Rating ("CIR"), Moody's also took into account factors detailed in "Structured Finance Counterparty Instrument Ratings Methodology" published in March 2022.

The rating of the Liquidity Facility Agreement is constrained as in Moody's view there remains a dependency on the performance of the sponsor.

Methodologies Underlying the Rating Actions:

The principal methodology used in rating the Class A5 Bond was "Operating Company Securitizations Methodology" published in April 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1214102. The principal methodology used in rating the Liquidity Facility Agreement was "Moody's Approach to Rating EMEA CMBS Transactions" published in May 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1264385. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

Factors that would lead to an upgrade or downgrade of the ratings:

Factors that may cause an upgrade of the ratings include a significant improvement of the credit quality of the parent company of the borrower and positive performance of the underlying operations of the pubs.

Factors that may cause a downgrade of the ratings include a significant deterioration of the credit quality of the parent company of the borrowers and negative performance of the underlying operations of the pubs. Increases in inflation and energy costs or costs of living pressures on consumer spending could potentially be a cause for negative performance.

An upgrade of the CIR is unlikely given the heavily operative, whole business-type operations of the borrowers. An increase of the probability of liquidity draws and/or a decrease in the underlying collateral value in the transaction may lead to a downgrade of the CIR.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

The analysis includes an assessment of collateral characteristics and performance to determine the expected collateral loss or a range of expected collateral losses or cash flows to the rated instruments.

Moody's quantitative analysis entails an evaluation of scenarios that stress factors contributing to sensitivity of ratings and take into account the likelihood of severe collateral losses or impaired cash flows.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

REFERENCES/CITATIONS

1. Spirit Issuer Financial Report – Quarter 4 (Jan 2022)

2. Spirit Issuer Financial Report – Quarter 1 (July 2020), and similar reports for subsequent periods

3. Spirit Issuer PLC Annual Report and Financial Statements for the 36 weeks ended 3 January 2021

4. Greene King Limited Annual Report and Financial Statements for the 36 weeks ended 3 January 2021

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.

James Morton
VP - Senior Credit Officer
Structured 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

Andrea M. Daniels
Associate Managing Director
Structured 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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