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Punch Taverns £2.7 billion restructuring inevitable, say distressed debt experts

Some bondholders fear that Punch’s management will walk away from the pubs in its troubled leased securitization portfolio. But more likely is a restructuring whose twists and turns may mirror the disaster that was Eurotunnel.

A restructuring of debt impaired and loss-making Punch Taverns looks increasingly inevitable, with some distressed debt experts ominously referring to the company as “the new Eurotunnel”.

The fundamental changes that have taken place in the pub sector in recent years mean that Punch, once the poster-boy of the European securitization sector, is now saddled with a funding structure woefully ill-suited to its needs. The majority of the debt the firm is labouring under is in two leased pub securitizations: Punch Taverns Finance and Punch Taverns Finance B.

The two structures had a combined outstanding balance of £2.7 billion by April last year and are struggling. Earnings for the 12 months to March 2010 were down 18.7% and 17.2% respectively. The problems stem from the tenanted, or leased, pubs (whose independent landlords pay rent to Punch and are required to purchase beer from the firm under a “beer tie”), which have suffered from the changes to consumption habits in the sector.

A restructuring of Punch would complete a spectacular fall from grace. It floated in 2002 and under former chief executive Giles Thorley, previously a member of Guy Hands’ principal finance group at Nomura, undertook breakneck expansion of the estate – which at one stage numbered 8,500 pubs.

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