'Ominous cocktail' threatens UK pub debt
The UK pub sector is undergoing its most challenging trading environment for many years as a result of an “ominous cocktail” of factors that continues to drive drinks sales down and accelerate pub closures, exerting greater pressure on the industry and the debt financing on which much of it stands.
Analysts at Fitch Ratings wrote in a report yesterday that the economics of the UK pub industry have come under increasing strain, forcing the spotlight on the stability and strength of the whole business securitisations that many of the pub groups have carried out to fund growth.
Mitchells & Butlers, which owns the All Bar One and Harvester pub chains, Punch Taverns, owner of the Spirit chain, and pub groups Whitbread and Wetherspoons have each regularly used the securitisation markets to unlock capital in recent years, making the industry a key target of investment banks.
However, two years after the introduction of the new licensing system and one year after the start of the English smoking ban, the industry is now faced with high cost pressures on food, beer and energy prices, and an uncertain retail and consumer environment, according to the Fitch report.
It added that combining this “ominous cocktail” with a widening price gap on alcohol with the off trade (alcohol sold through a shop), long lasting poor weather since summer 2006, a high above inflation increase in alcohol duties, and England not taking part in the Euro 2008 football championships, and “it seems like UK pubs and pubcos are being put to the test more than ever”.
Still, Guillaume Langellier, director in Fitch’s global infrastructure & project finance team, said: “With the exception of some weaker transactions, we believe the majority of the pubs securitised are of top-tier quality and that the current period is only a temporary stress, not a reflection of the industry’s future.”
Nevertheless, the agency believes that a substantial part of the industry, especially smaller pubs, the traditional “wet-led”, which are those that predominantly sell drinks compared with food, or urban pubs without outside trading areas, will suffer, leading to a run of possible closures.
According to the British Beer and Pub Association, on trade beer sales fell by 6.5% and 1,409 pubs closed last year compared 2006, when only 216 pubs closed. Fitch maintains 54 credit ratings on nine transactions, which are directly secured on about 18,000 pubs – roughly a third UK pub universe.
Fitch said there are a number of factors underpinning its ratings: quality and location of the pubs; geographical diversification; successful investment or conversion programmes, attractive drink and food offer to existing and new customers; active and experienced tenants; and motivated managers among others.
The majority of rated pub transactions are also designed to withstand heavy stresses, Fitch said. That is most have strong structures with cash trap mechanisms protecting noteholders when performance deteriorates, 18 month liquidity facilities or loans and the ultimate recourse to a fully controlled administrative receiver if the borrowers ever defaulted.
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