Feb 12 - Fitch Ratings has placed all notes issued by Punch Taverns Finance Plc’s (Punch A) and Punch Taverns Finance B Ltd (Punch B) on Rating Watch Negative (RWN). This follows Punch Taverns plc’s (Punch) announcement of its proposal to restructure the capital structure of the two associated pub securitisations. Fitch considers the restructuring proposal (if implemented in the way proposed) would only represent a distressed debt exchange (DDE) for the junior tranches in Punch B that would be partially written down.
Punch has proposed to restructure the group’s capital structure by - among other things - extending the maturities of the notes issued by Punch A and Punch B, deferring scheduled amortisation, modifying covenants as well as extinguishing some of its junior Punch B debt. However, many details of the restructuring proposal are still left open.
When considering whether a transaction or class of notes should be classified as having experienced a DDE, Fitch would expect both of the following to apply: the relevant noteholders will suffer a material reduction in terms compared with the economics of the existing contractual terms; and the restructuring or exchange will avert a probable payment default on the underlying notes.
For all tranches, including those which (based on Punch’s current proposal) would not be subject to an immediate notional debt write off, Fitch considers Punch’s proposal to represent a material reduction in terms compared with the economics of the existing contractual terms - amongst others due to the deferral of amortisation and extension of maturities (without the compensation of e.g. increased coupon payments). However, Fitch does not consider the proposal (if implemented) to avert a probable payment default on the underlying notes (which are not subject to an immediate notional debt write off) given that junior tranches can defer debt service without triggering a note event of default and given that Fitch does not expect the Punch A and Punch B senior tranches to fail on their debt service in the foreseeable future (without a debt restructuring).
While Fitch believes that the credit quality of the notes issued by Punch A past such restructuring would not be materially different to their current rating, placing them on RWN is mainly driven by the execution risk of any restructuring and potential de-grouping risks from the wider Punch group due to operational linkages with management and supply arrangements controlled at group level.
Similarly Fitch believes that following such restructuring, the credit quality of Punch B’s senior notes may not deteriorate beyond their current rating but placing them on RWN is mainly owing to the execution risk of any restructuring and potential de-grouping risks from the wider Punch group. The situation would be viewed differently for Punch B’s junior debt tranches. If the restructuring of Punch B was announced in its currently proposed form Fitch would likely downgrade the tranches B1, B2 and C1 to ‘C’ and eventually to ‘D’ upon execution of the transaction. Post restructuring a newly issued class B3 could potentially be rated higher than ‘CCC’ due to deleveraging at the class level but will depend on the terms of the transaction.
Fitch understands that such proposals have the support of the majority of the group’s shareholders, involved monoline insurers and some (mainly junior) bondholders. However, the proposed capital restructuring may potentially not be implemented in the currently proposed form subject to negotiations with other stakeholders.
The current ratings for the transactions are as follows:
Class A1(R) fixed-rate notes due 2022: ‘BBB-'; RWN
Class A2(R) fixed-rate notes due 2020: ‘BBB-'; RWN
Class M1 fixed-rate notes due 2026: ‘B’; RWN
Class M2(N) floating-rate notes due 2029: ‘B’; RWN
Class B1 fixed-rate notes due 2026: ‘CCC’; RWN
Class B2 fixed-rate notes due 2029: ‘CCC’; RWN
Class B3 floating-rate notes due 2031: ‘CCC’; RWN
Class C(R) fixed-rate notes due 2033: ‘CCC’; RWN
Class D1 floating-rate notes 2032: ‘CCC’; RWN
Class A3 fixed-rate notes due 2022: ‘B+'; RWN
Class A6 fixed-rate notes due 2024: ‘B+'; RWN
Class A7 fixed-rate notes due 2033: ‘B+'; RWN
Class A8 floating-rate notes due 2033: ‘B+'; RWN
Class B1 fixed-rate notes due 2025: ‘CCC’; RWN
Class B2 fixed-rate notes due 2028: ‘CCC’; RWN
Class C1 floating-rate notes due 2035: ‘CCC’; RWN