Termsheet: Last orders

It’s late May. The board of Punch Taverns meet and decide to publically acknowledge their willingness to consider, for the first time, diluting shareholder equity as part of a plan to restructure their company’s ailing balance sheet. For almost a year and half, the company’s management team has tussled with investors in the company’s twin securitisations.

The latest proposal, the fourth since early 2013, calls for a 26 percent write-down of the company’s debt, bringing its debt-to-EBITDA ratio down to about 7.7x. Gross securitisation debt of £1.58 billion would have an effective interest rate of 7.9 percent including a PIK element. Shareholders will retain some of their equity, and junior noteholders will also remain in the money. By the time you read this, the various parties may well have voted on the proposal. According to sources close to the process, it’s highly likely it or something close to it, will be approved.

The tale of Punch Taverns, which runs 4,000 pubs across the UK and is the country’s second largest pub leasing company, is labyrinthine, complicated by the company’s tangled capital structure and the sheer number of stakeholders involved (see boxout).

Hugh Osmond and Roger Meyers formed Punch in 1997, having acquired a portfolio of public houses from Bass Lease Company. Since then, the company has grown through a number of acquisitions to become one of the leading pub operators in the UK. It has spun off parts of the business, such as Spirit Group, only to subsequently re-acquire them.

Although the acquisition spree led to it becoming a major player in the UK market, it did leave the company’s balance sheet in a parlous state. After a strategic review in March 2011, Punch announced that its structure was not sustainable and it emerged that the firm risked defaulting on its debt. Since then, it has been offloading assets in a bid to shore up its financial position.

A TALE OF TWO SECURITISATIONS

Debt on the company’s balance sheet is split between two securitisations, Punch Taverns Finance (Punch A) and Punch Taverns Finance B (Punch B). Together they accounted for about £2.3 billion of debt according to the company’s latest annual report, filed in August last year. Servicing those securitisations has been onerous, not helped by the challenging consumer environment in the wake of the financial crisis. Punch still managed to generate EBITDA of £213 million for the FY 2013, however.

Despite this, Punch A and B, with debt outstanding at £1.4 billion and £884 million respectively as at August last year, continued to require financial support through the use of cash resources held outside of the securitisations to maintain compliance with their DSCR (debt service cover ratio) covenants. Without this support, both Punch A and B would have breached their covenant levels and defaulted.

Net support from the wider group to the securitisations amounted to £23 million for the year, and was anticipated to significantly increase for 2014, largely due to a step-up in coupons from 1 July 2014. A covenant waiver granted on 15 May this year enabled Punch A to avoid default, but was granted on condition that a consensual restructuring would be implemented by 30 June. Thus, it’s likely an extension to this deadline will be sought to facilitate any further tweaks.

If the securitisations were to default, the properties would enter receivership. Recoveries generated from the sale of the properties securing Punch A and Punch B were valued at £1.42 billion and £906 million as at 1 March 2013, and would in theory be sufficient to repay noteholders. However, in a wind-down scenario, the costs associated would likely impact recoveries negatively. In default, some or all of a swap would also crystallise, the mark-to-market of which was £242 million, as at January 2014. Market sources indicate the value would therefore break in the ‘M’ class notes.

A RAFT OF RESTRUCTURING PROPOSALS

Punch Taverns announced three proposals in 2013: the first in February, a revised version in June; and a third in December, which was formally launched on 15 January 2014. However, all were deemed unacceptable to a senior creditor group with a blocking position in both securitisations – the Association of British Insurers (ABI) Special Noteholder Committee.

Their criticisms of the proposals included a lack of clarity over a long term solution for the securitisations or the group, (and in particular the continued over-leveraging of the business in their view), to complaints about the lack of meaningful engagement with the borrowers or the shareholders.

In January 2014, a vote set for 14 February 2014 was cancelled as a result of further ABI objections. Key terms including a cash-out of senior and junior notes, cash leakage to junior noteholders and shareholders, and the structure of new notes, were not agreed to by the ABI group.

Yet finally, a proposal arrived in May that looked more like a ‘normal’ restructuring and specifically like the restructuring the senior noteholders wanted all along. As you read this, there’s a strong chance a vote will have been carried in favour of the proposals.
The proposed solution requires junior noteholders to exchange their notes for a combination of cash, new junior notes, and ordinary shares in Punch. A group of junior creditors would also be offered Punch shares at a large discount in order to fund the repayment of junior notes in Punch A.

The injection of new money would include a £20 million payment from Ambac to be released from its monoline guarantee.

The proposal would lead to about £600 million of the company’s £2.3 billion debt being written down. Noteholders would win control of about 85 percent of the company, with shareholders holding the remaining 15 percent of equity.

The junior noteholders have used the time to negotiate on a feature of the securitisation they see as adding value to their notes. By virtue of the structure, in the event of a default all noteholders would continue to receive interest payments by the liquidity facility providers, RBS and Lloyds. And these drawings would become super-senior in the order of payments, thereby putting principal recoveries at risk.

With a step-up in coupons due, the junior noteholders would stand to collect a sizeable amount of coupon payments under this scenario and as a result this ‘value’ has been reflected in the current proposal.

AN END IN SIGHT?

Ultimately, the junior note and equity holders are likely to be compensated, thanks to the impetus given to the process by investors who hold both instruments, and have sought to exploit features in the securitisation documents. It wasn’t until late last year, however, that junior and senior noteholders engaged in talks with one another, but those have since borne fruit with the latest offering that could, finally, put an end to a long-running and damaging restructuring dispute. All parties declined to comment.

PUNCH TAVERNS TIMELINE

1997
Punch Pub Company is established.

May 2002
Punch Taverns PLC lists on the London Stock Exchange.

April 2006
Acquires the Spirit Group.

March 2011
Punch announces its intention to demerge the managed business to create the Spirit Pub Company.

7 February 2013
Punch publishes its first restructuring proposal. Noteholder committee says the proposal is “unacceptable”.

10 June 2013
Punch announces a revised restructuring proposal. The ABI special noteholder committee again rejects the proposal.

25 September 2013
Punch announces its annual results for FY2013, aims to launch a restructuring in Q4.

4 November 2013
Punch publishes details on key points of disagreement.

15 January 2014
Punch announces its ‘final’ restructuring proposal.

12 February 2014
The vote set for 14 February is withdrawn.

15 May 2014
Covenant waiver is approved to avoid default on Punch A, on condition a restructuring is launched by 30 June 2014.

WHO’S WHO – THE STAKEHOLDERS

A restructuring of Punch requires the approval of all 75 percent of the 23 different stakeholders: the holders of each of the 16 tranches of notes; shareholders; the two monoline insurers, Ambac and MBIA (which insure around £730 million and £204 million in notes respectively); the two hedge counterparties, RBS and Citigroup; and the two liquidity facility providers, RBS and Lloyds.

As at 23 September 2013, substantial shareholders in Punch included Glenview Capital Management, Luxor Capital Group, Octavian Special Master Fund, Aberforth Partners, Avenue Capital Management, Legal & General Investment Management and Angelo, Gordon & Co.

Junior noteholders are thought to include Alchemy Partners, Oaktree Capital and Warwick Capital Partners.

Goldman Sachs and the Blackstone Group have been advising Punch Taverns, while Moelis and Linklaters are understood to have been working with the junior noteholders.

The ABI special noteholder committee is advised by Rothschild and Latham & Watkins.