Two structured finance vehicles disguised as listed companies appeared before a UK parliamentary committee yesterday.
Opening line of a bad joke? Absolutely.
The Business and Enterprise Committee heard evidence on Tuesday from the chief executives of Punch Taverns and Enterprise Inns.
The Guardian has a nice graphic (right) illustrating the relationship between debt (red) and total company value
(grey) at Punch and Enterprise. It perhaps gives a hint of why a parliamentary committee is interested in speaking to the two most prominent “pubcos”.
We here at FT Alphaville have written about Punch and Enterprise before. If you’ve read those posts – or seen much of the sector analysts’ comment on the two pubcos – you’ll know that almost all of that red debt is burden born through securitization vehicles. Really the situation is somewhat worse than the MPs realise.
The securitisation vehicles basically “own”, or at least have a first claim on, the actual assets – pubs – behind Enterprise and Punch. And they are within range of breaching certain key income-based triggers.
Triggers, that if breached, would sever cashflows from the assets to the parent pubcos and in the worst case scenario, sever the assets altogether. This is why house broker to Punch, Morgan Stanley, has a worst-case scenario price target on the equity tranche of said pmbs pubco of just 10p.
All of this should make the shareholders in the two companies very sensitive to news about both the macroeconomic situation, and perhaps more specifically, the economic situation facing the pubcos assets: that is, tenants in pubs.
Because signals of significant deterioration in the viability of income from those assets might be the first pointers towards possible looming securitization covenant breaches.
The Guardian reports, emphasis ours:
Britain’s two biggest pub landlords, Enterprise Inns and Punch Taverns, saw 929 of their publicans fail in the last 12 months – either forced out after breaching lease agreements or handing back the keys because they were unable to make a living from the business.
Figures on pub failures are not revealed in updates to shareholders but were given by industry leaders who appeared before the Commons business committee yesterday.
The 575 failed Punch pubs represent just over one in 13 of the group’s 7,560 leased houses, though the chief executive, Giles Thorley, told MPs that 84% of these sites had been quickly relet.
At Enterprise, publican failures occurred at just under one in 22 of the group’s 7,763 pubs. Ted Tuppen, chief executive, told MPs that about half of the failures were tenants handing back the keys and the rest were forced out after contract breaches.
Good luck to the new tenants in those pubs. The reality is that the pubcos will squeeze their tenants harder and harder to extract as much income from them as possible in the coming months. This will allow them to delay – or perhaps avert – some of those securitisation triggers, but it will run hundreds of pubs, and publicans, into the ground.
Roll on the next parliamentary enquiry.
Update at 16:44 GMT
Redburn note on Pubcos is rather bleak, particularly on Punch:
Self help through a rights issue looks to be near-impossible; company is heading for “Zombie” status
Fair Value: Nil (down from 189p with a rights issue)
Overall, therefore, we now believe that equity investors will probably never see another penny out of PUB in the form of dividends, buy-backs, etc. While equity holders will “enjoy” the theoretical capital value uplift as the debt is amortised (equity becomes a larger part of the EV), even this is of questionable value. Equity holders only own the PUB TopCo and even after the convertible is refi-ed in 2010 the TopCo will be a near-empty shell through which a small amount of cash will be washed each year to pay taxes and and pension contributions.
What value is a “zombie” shell company that is never able to receive and retain a penny in cash upflow from its SPV subsidiaries ? We would argue Nil, and thus we are today moving our fair value on PUB shares to Nil, and re-instigating our Sell recommendation.