TEXT-S&P affirms all Spirit issuer ratings;outlook positive

Oct 24 -

OVERVIEW

-- We have affirmed our ratings on all classes of notes issued by Spirit Issuer.

-- Since the demerger from Punch Taverns, the company has posted strong results in the managed business, resulting from significant capital investment and branding in the estate. However, performance in the leased business has been below what we forecast for 2012.

-- We have also revised the outlook on the ratings to positive from negative, reflecting our opinion that if the transaction continues to perform in line with our base-case assumptions, we could raise the ratings on the notes within the next 12 to 24 months.

-- Spirit Issuer is a corporate securitization backed by operating cash flows from a mixed estate of tenanted and managed pubs owned by Spirit Managed Pubs. The transaction closed in November 2004.

Standard & Poor's Ratings Services today affirmed its credit ratings on all classes of notes issued by Spirit Issuer PLC (Spirit). At the same time, we revised to positive from negative the outlook on the ratings (see list below).

Today's rating actions reflect our opinion of the fair business risk profile of the borrower's operations, as well as the structural enhancements in the transaction. Our opinion addresses the issuer's financial ability to meet full and timely payment of interest and principal on the class A notes.

In our opinion, the transaction's performance has improved since the demerger, and the estate has improved following branding and significant capital investment. Despite a weakening in the U.K. economy, the business delivered revenue growth of 3.2% in the financial year-ended August 2012, and 1.3% in the financial year-ended August 2011. This revenue growth was entirely driven by the managed segment, which generates about 74% of the business EBITDA, and where Spirit has been a leading performer, albeit from a relatively poor base. The combined EBITDA increased by 4.4% for 2012, and 7.0% for 2011.

The positive outlook reflects our view that we may raise the ratings on the notes in the next 12 to 24 months, if the business performs in line with our base-case forecast. This includes an increase in the EBITDA margin in the managed business division to 19%, and the tenanted pub division seeing the EBITDA margin decline to not less than 40%. We anticipate that if the company achieves these metrics, it will generate adequate cash flow, which, combined with structural enhancements such as a GBP194 million liquidity facility, could be sufficient to cover debt service under the notes for the life of the transaction under our 'BB' stress scenario. An upgrade would also likely depend on the company maintaining its current "fair" business risk profile. We could also take a positive rating action if we revised upward the company's business risk profile.

Spirit is a corporate securitization backed by operating cash flows generated by the borrower as the primary source of repayment of an underlying issuer-borrower secured loan. The ultimate parent of the borrower is the Spirit Group. Spirit operates both managed and tenanted pubs with an increasing importance in terms of the number of pubs and EBITDA generation coming from the managed segment since the demerger.

Until mid-2011, Spirit was a division of Punch Taverns PLC, the former parent company. Following its strategic review in early 2011, Punch Taverns PLC split from Spirit, which became part of a new separate company, with the newly-formed Spirit Group as parent company. In doing so, the cash at the former parent company level was split between Spirit Group and Punch Taverns, with GBP61 million cash and GBP42 million bonds going to Spirit Group. The transaction closed in November 2004.

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RATINGS LIST

Ratings Affirmed; Outlook Revised

Spirit Issuer PLC

GBP1.25 Billion Fixed And Floating Rate Asset-Backed Debenture Bonds

Class Rating

To From

A1 BB- (sf)/Positive BB- (sf)/Negative

A2 BB- (sf)/ Positive BB- (sf)/ Negative

A3 BB- (sf)/ Positive BB- (sf)/ Negative

A4 BB- (sf)/ Positive BB- (sf)/ Negative

A5 BB- (sf)/ Positive BB- (sf)/Negative