Long a poster child for the concept of corporate securitization, the UKs largest pub group, Punch Taverns, now finds itself at the centre of what could be a spectacular disintegration of the concept. An eyewatering 97% of Punchs £5.2 billion ($8 billion) pub estate has been securitized a process driven by former chief executive Giles Thorley, who co-founded Nomuras Principal Finance Group with Guy Hands in the early 1990s. These deals are, however, now on life support, and the stage is set for a landmark standoff between bond and equity holders over their future.
The pub operator, which expanded rapidly before the credit crisis, has struggled since, experiencing a 20% decline in trade beer volume over the past three years. The managed pub business is faring better than the leased and tenanted business but overall the group is saddled with £3.14 billion of debt, giving it a net debt-to-ebitda ratio of 7.5.
Most of the leased estate (5,325 pubs) is held in two securitized vehicles that now require financial support to the tune of £43 million a year to prevent them from breaching their debt service coverage ratio triggers. This is a situation that must be sorely trying equity holders patience and, with the recent appointment of new chief executive Ian Dyson, one that is likely to come to a head in the first quarter this year.
The options facing Dyson are tough. Punch has cut the size of its leased estate by 21% in the past two years and has a further 1,300 pubs earmarked for sale. Attracting a trade buyer would still, however, be a tall order and several private equity buyers are circling. But in order to turn the company around the unsustainable securitizations must be tackled.
Given the size of the deals, this could be quite a fight. The two leased pub securitizations total £2.5 billion and a third deal, comprising managed and leased pubs, totals £878 million. All three have breached covenants and are therefore cash-trapped (whereby no cash can be diverted from the structure). One radical suggestion is that Punch should simply default on the leased estate securitizations and put the assets 5,325 pubs in the hands of the bondholders. Despite the catastrophic reputational consequences, this would please equity holders, who would no longer have to support the deals. But it would infuriate the bondholders who would be left with a choice of a firesale of the estate or attempting to run the pubs under new management. The alternative is a significant haircut on the bonds something that the bondholders would hardly be keen on either.
Punch is now understood to have hired Goldman Sachs and Blackstone to advise it on restructuring its debt, while the bondholders are believed to have hired Rothschild. So the lines are drawn for a battle royal in the sector that was the securitization markets darling for so long. Watch this space.