TEXT-Fitch affirms Unique's Class A, M, and N, negative outlook

Thu Dec 20, 2012 9:59am EST

Dec 20 - Fitch Ratings has affirmed Unique Pub Finance plc's (Unique) Class
A, M and N notes at 'BB', 'B+' and 'B' respectively. The Outlook on all classes
is Negative. A full list of rating actions is at the end of this comment.

The affirmation is mainly driven by both the significant slowdown in performance
decline with Enterprise Inns Plc (ETI, a good proxy for Unique) FY12 (ending in 
September) LFL net income declining only by 1.2% (vs. 4.3% in FY11), and the 
deleveraging of the transaction by 0.3x (achieved mainly through prepayments 
from proceeds of pubs disposals, and opportunistic purchases of discounted 
notes). The Negative Outlook mainly reflects the ongoing macro difficulties 
facing the wet-led tenanted pub industry and related potential performance 
volatility (with lack of visibility in its sustainability).

Like other tenanted operators in the UK pub industry, Unique continues to face 
significant headwinds with additional downward pressure from a consistently poor
UK economic outlook. The estate remains primarily wet-led (food sales 
representing ca. 25% of total sales, in contrast to ca. 50% for other managed 
pubs operators) and is slow to react to the growing pub eating-out market with 
Unique's input being largely limited to advising tenants. In addition, many 
tenants are constrained by a lack of critical investment capital as they 
struggle to cover operating costs. 

The continued decline in performance has been offset to some extent by the 
combined effect of the ongoing disposal programme (-4.9%), debt prepayments 
(funded via the disposal proceeds account (DPA) with the class A2N notes having 
been prepaid in full in FY12) and repurchases (avoiding spens) of the remaining 
class A fixed rate notes via excess cash (amounting to GBP65.3m at an average 
discount of 20%). Altogether, this had a positive effect on EBITDA leverage 
(including GBP65m of cash reserve) reducing it to 5.6x, 7.1x and 8.3x from 6.0x,
7.4x and 8.6x for the class A, M and N notes, respectively. However, this 
strategy remains fragile as Unique remains exposed to weak consumer 
discretionary spending, and dependent on the ability to continue selling weak 
pubs at reasonable prices and buying bonds at a discount. 

Without further prepayments, Unique faces a significant increase in debt service
with amortisation resuming in September 2013. Deferring this (which it is able 
to do given the transaction's unusual prepayment mechanics, allowing it to 
temporarily switch to interest only payments) involves making further 
prepayments or repurchases (through excess cash). Given that Unique has already 
sold or transferred some of their higher quality pubs (based in London) via 
exchanges with ETI in order to complete opportunistic sale & leaseback deals 
with attractive yields, future disposal proceeds may be lower. In addition, 
Fitch is generally concerned about the potential erosion of the overall quality 
of the estate notably in terms of long-term cash generative operations.

Fitch has forecast for its base case marginally negative EBITDA and FCF growth 
to legal maturity in 2032, resulting in actual FCF DSCR metrics (minimum of 
average or median) which are expected to fluctuate around 1.51x, 1.01x and 1.10x
for the class A, M and N notes respectively. However, for the Class A and N 
notes, the long-term metrics do not give an accurate indication of coverage for 
a substantial portion of the forecast period (from today until about 2024), due 
to Unique's unusual debt profile which conceals the much lower coverage during 
the more critical earlier years.Rating Criteria for UK Whole Business Securitisations
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.