Punch Taverns warns against Valentine’s Day bondholder massacre

Louise Bowman
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Lenders set to vote on shape of final restructuring on February 14; vocal bondholder opposition could trigger default on £2.3 billion debt pile.

“The next few days will be some of the most important in the company’s history.”

This was the stark warning from Stephen Billingham, executive chairman of UK pub group Punch Taverns on February 5.

The company faces a bondholder vote on the proposed restructuring of its £2.3 billion debt pile on February 14 – a vote the firm has said will trigger a default on the bonds if it does not pass.

“The board believes that the restructuring proposals deliver more value for all noteholders than default,” insisted Billingham. “Everyone has something to gain by voting for the proposals.”

Stephen Billingham, executive chairman of Punch Taverns
He said that the proposals would deliver a capital structure with material deleveraging of senior notes and enhanced junior note PIK interest. “Although they would result in debt to ebitda of around nine times and an interest expense of around 9% per annum, which is at the upper limit for a pub securitization, the board believes that they would provide a stable capital structure,” he claimed.

Many would disagree that a debt-to-ebitda multiple of nine times translates into a stable capital structure and many of Punch’s lenders are among them. The senior noteholder committee formed under the auspices of the ABI rejected the final restructuring proposals shortly after they were released on January 15.

Together with three junior creditors they announced on January 27 that: “The creditors and their advisers have carefully considered the revised proposals issued by Punch and the related legal documents made available,” they said. “They are unable to support these proposals [in relation to either securitization vehicles Punch A or Punch B] and accordingly will vote against the proposals at any meetings of the issuer companies.”

The majority of the firm’s senior debt is understood to be in the hands of a group of large institutional investors: Aviva, Kames Capital, M&G, Legal & General, BlackRock and Standard Life.

The junior creditors party to the announcement were Angelo Gordon, Oaktree Capital Management and Warwick Capital Partners. Significant stakes in Punch debt are also held by Glenview Capital Management, Luxor Capital Group, Octavian Special Master Fund, Aberforth Partners, Alchemy Special Opportunities Fund and Avenue Capital Management.

“It is well known that certain creditors with blocking stakes have said they do not support the proposals,” Billingham conceded on February 5.

“There are also other creditors with conflicting views who have blocking stakes. We have tried to listen to everyone and find a middle way. While it is not possible to accommodate all of the conflicting views, Punch has attempted over a 14-month period of engagement and at significant financial cost and management time to find a balance between these conflicting views.”

The latest restructuring proposal, which was set out after the firm’s December 9 announcement of its intention to lay out final terms, is the fourth attempt to get the company and its lenders to agree.

Punch has habitually threatened to default on its £2.3 billion of outstanding debt, held in Punch A and Punch B, if bondholders do not consent to its plans, and that threat was reiterated again in the latest scheme.

“The restructuring proposals are final,” the firm declared in a statement. “Failure to effect a restructuring is expected to lead to default in the near term at which point securitization cash resources [used to facilitate the restructuring] are expected to be severely depleted with the mandatory prepayment of £188 million of available cash to Class A notes at par and loss of the £52 million group cash contribution.”

Punch and its lenders have been playing a game of chicken over this massive restructuring of its debt load for some time now. The vote is set to take place on February 14 and given the creditors strongly worded announcement, it now seems inevitable that the plans will be rejected.

One source close to the bondholder group does not mince his words. “The deal on the table fails on three counts: the commercial terms are unacceptable to multiple groups of lenders; the structure of the new notes is flawed; and the documentation is unsignable,” he declares.

Punch needs 75% approval from all 16 groups of its lenders for the deal to go through. Punch’s junior debt is in the hands of specialized distressed debt funds, not traditional whole business securitization buyers, but the seniors are not going to roll over without a fight. The £2.3 billion question is whether Punch will pull the trigger and default.

The Punch situation has always been an interesting case study in the conflicts of interest between investors owning different and multiple securities classes in a restructuring. Many of the funds that hold substantial amounts of the subordinated debt also have large equity stakes. This has given them greater heft in the restructuring negotiations.