In other words, Punch, having breached (but subsequently cured) an interest payment covenant, has agreed to line-up a financial adviser that the trustees could appoint immediately should the company breach its covenants again.

Let’s be clear, a ‘financial adviser’ is not the same as an ‘administrator’. According to Spirit’s bond prospectus, the role of the adviser is “to produce a report and review the company’s management of the assets and consider what steps should be taken to remedy the event that triggered the appointment of the adviser in the first place.”

However, as one debt analyst explained, the fact that trustees have asked Punch to talk to potential financial advisers is like an “early warning trigger.”

Here’s how one analyst put it:

The trustees know any recommendations made by the financial advisers are not compulsory. But the reason they put in the clause is so that they can start getting someone through the door earlier. It’s about getting a foot in the company so that if things gets worse, the adviser can then quickly take on the role of an administrator if needed

So while investors have whipped themselves into a buying frenzy this week, trustees are clearly nervous — nervous enough to want Punch to get a financial adviser on standby anyway. And you can’t blame them. Punch’s shares might have rallied this week but investors should not forget the company is still skating on thin ice. Like-for-like profit at its core leased and tenanted estate is still in double-digit decline.

The Punch A estate had an H1 DSCR of 1.55x, only just above the 1.5x upstream test. Punch B’s DSCR in H1 was 1.92x, compared to the upstream test of 1.85x.

All it takes is for trading to take another dive for the extra headroom that Punch has bought itself through the debt buyback to be erased.

Related links:
A rough history of British securitisation 2003-2008, Punch edition – FT Alphaville
Punch Taverns’ cliff risk – FT Alphaville
Over a barrel; off a cliff – FT Alphaville
A free house – FT Alphaville