Punch Taverns finally inks debt-for-equity swap to end marathon restructuring battle

Louise Bowman
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Bondholder groups join forces to push through a deal that reduces the indebted pub group’s leverage to 7.7 times.

UK pub company Punch Taverns finally completed its marathon restructuring on Wednesday, bringing to a close a protracted, complex and often ill-tempered case study in how the restructuring of highly structured deals with multiple counterparties shouldn’t be done.

After fighting against it for years, the company has finally signed off on a debt-for-equity swap with its junior lenders that reduces total net debt by £600 million – including mark-to-market on interest-rate swaps – in return for the issue of 3,771,151,200 new ordinary shares to junior lenders in the firm’s securitized debt.

These, together with the existing ordinary shares, will be consolidated on a one-for-20 basis into new consolidated ordinary shares.

The gross securitized debt of Punch Taverns via its two securitizations (Punch A and Punch B) now stands at £1.6 billion. Gross debt outstanding under Punch A is now £966.4 million, down from around £1.4 billion, while gross debt in Punch B is £637.9 million, down from £914 million, giving the firm a net debt to ebitda ratio of around 7.7 times – down from nearly 11% beforehand.

The deal is the culmination of nearly four years’ worth of negotiations. Punch hired Blackstone to advise on a potential restructuring in November 2010. At that stage, the Punch A and Punch B securitizations, which had been restructured once, had a combined outstanding balance of £2.7 billion and were struggling as earnings were hit by changes to consumption habits in the UK pub sector.

Punch also held its Spirit managed pub estate in a 1,222-pub cash-trapped securitization.

Following the results of a strategic review in March 2011, the company decided to spin off the Spirit estate rather than undertake a wholesale restructuring. This took place in July 2011.

Bowed to inevitable

However, after yet another capital structure review in October 2012, it bowed to the inevitable and announced restructuring proposals in February 2013. At this stage, it still had £2.4 billion outstanding in the securitizations, which were effectively being kept alive by equity cures to pay the coupons on the debt.

The structure of the proposed deal set the stage for what was to become a pitched battle between different lender groups and between the debt and equity holders. This was complicated by the fact that, at least in the junior tranches, the debt and equity holders were often the same.

By the time the restructuring was announced in February, distressed buyers had been building up their positions in the junior debt and equity of Punch B for the previous six months. Five funds – Glenview Capital Management, Octavian Special Master Fund, Luxor Capital Group, Alchemy Special Opportunities Fund and Avenue Capital Management – held more than 50% of the share capital and most of the junior debt at this stage.

Indeed, two funds – Glenview and Luxor – are understood to have held 10% of the PLC equity apiece.

It was for this reason the initial restructuring proposals focused almost solely on Punch B and were so favourable to the junior lenders in that deal. The equity holders were more motivated to work on a restructuring of Punch B, as they didn’t want to be diluted via a debt-for-equity swap.

"Punch’s proposal in February 2013 made it obvious that Punch B was the only securitization that was being properly restructured," says a source close to the negotiations at the time. "The plans for Punch A resembled a massive amend and extend. A number of major shareholders in the PLC also held junior notes in Punch B, so they were more incentivized to see a restructuring of Punch B than Punch A."

This was a marathon not a sprint because of the sheer number of parties that had to give their consent
Source close to the deal

The plan was to pay down Punch B junior debt and extend the senior debt in both vehicles by five years. However, the company was proposing to buy the Punch B junior notes back at around their market price (between 63 and 65) and also hand the junior lenders £93 million in cash and new notes worth £56 million. The idea of equity dilution was dismissed out of hand.

The junior-friendly deal infuriated senior bondholders, who had hired Rothschild to advise them and formed a committee under the auspices of the ABI. Despite the company’s repeated threat it would default on the debt if the deal was not accepted, it backed down and returned to the negotiating table.

The situation at Punch was made doubly difficult by the fact there were 17 different classes of lender to the company and any proposal had to get the approval of all of them. The senior debt was in the hands of a group of large institutional investors, including Aviva, Kames Capital, M&G, Legal & General, BlackRock and Standard Life.