Punch Taverns’ good pub, bad pub split hits bondholders

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By:
Louise Bowman
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Embattled debtor looks to buy time as performing managed pub business is removed from leased pub division operations

READ IN-DEPTH COVERAGE OF THE ISSUES FACING PUNCH AND ITS BONDHOLDERS

Troubled UK pub group Punch Taverns released its much-anticipated strategic review yesterday with the announcement that it plans to split itself in two. Chief executive Ian Dyson said the firm will demerge its performing managed pub division from its struggling leased pub division – in effect creating a “good pub, bad pub” structure.

Bondholders in the debt-laden company are under no illusions about what this means: they see it as a way for the company to protect the good part of the business from the necessary and painful restructuring that must come for the leased estate. In an angry announcement yesterday, the Association of British Insurers (speaking for the bondholder committee) said: “This review does nothing to address this key issue of turning around the trading, and rather than engage in discussion with bondholders about that now, it prioritises a demerger of Spirit costing £30 million. This says a lot about where Mr Dyson and the [company] see their priorities. This strategic review does nothing to address the issues in the tenanted estate and is a “walk-away” by another name.”

What the demerger might be trying to achieve is the debt for equity swap that seems the most likely solution for the £2.7 billion securitized bonds outstanding. By ring fencing the leased business away from the managed business, management might now be able to get shareholder approval to equitise junior debt in the Punch A and B structures. The strategy avoids the much-touted ‘nuclear’ option of defaulting on the securitizations – something that Euromoney predicted the company would not pursue in its March cover story.

But rumours about what Punch would do with the leased pub division have been around for some time. As one market veteran tells Euromoney this month: “All this talk about walking away from the pubs is just softening up the bondholders for a really bad deal.” Many investors will now understand the wisdom of that prediction.

Dyson is also hoping to buy time until the trading environment improves. It will pump around £120 million into the leased business to keep the debt structures from breaching their covenants while it tries to sort out operations. By pumping money in – and including the successful drinks wholesaler Matthew Clarke in the leased part of the operation – Punch management are trying to send a signal that they still see value in the business. This may be good news for bondholders as it will make any sort of debt write-off far more difficult.

Punch’s plans, which also anticipate the sale of around 2,000 leased pubs over the next five years, will achieve the management’s aim of avoiding a showdown with bondholders by effectively dragging the restructuring process out. £120 million will get them another three to four years by which time they must be hoping that they can sort the pub estate out.

Many frustrated bondholders may have preferred an outright default in order to seize control of the estate themselves. "It is disappointing that the company continues to be driven by its capital structure rather than by its strategy," observes Paul Crawford, asset backed strategist at RBS in London. “This whole process is clearing the decks for a future restructuring. It is positive that the bonds are no longer trading on fear, but it is difficult to approach a restructuring when you don't know what the profitability of the business is. This should become clearer over the next six to nine months."

What is already clear is that the Punch restructuring will, as we predicted, be a long and drawn-out process – and will earn its sobriquet of “the next Eurotunnel”.