US Edition Punch Taverns
15punch
Questor says SELL
INVESTORS thinking of gaining from the recent recovery in Punch Taverns’ shares are taking a very big gamble.
Yesterday, the group admitted that the future of the company was now in danger unless an agreement can be reached with lenders.
The situation now facing anyone holding the shares is stark. If Punch management cannot find a way to restructure the debt, then it is highly likely the company could default. Lenders could then request early repayment of all the outstanding debt.
“These circumstances represent a material uncertainty that casts significant doubt on the ability of a significant part or substantially all of the group to continue as a going concern,” Punch directors said.
Punch Taverns has been labouring under a debt mountain ever since it demerged from the Spirit Pub Company in 2011. Punch’s lengthy negotiations with lenders over renegotiating its complex debt structure have so far come to nothing.
Punch is financed by two major loans. These loans are backed by property assets, something called securitisation in the banking industry. The loans are split into Punch A securitisation of £1.45bn in gross debt, and Punch B securitisation of £884m in gross debt.
The size of the debt problem is therefore vast. The company said net debt – debt less cash on the balance sheet – was £2.3bn for the year ended August 17. Putting that in perspective, it is more than seven times the shareholder’s equity of £296m, and almost 25 times the current market capitalisation.
Punch said discussions to restructure the debt were now taking longer than expected. The board of the pub group said it believes that a “consensual restructuring can be launched by the end of 2013”.
However, the company warned that due to competing claims of shareholders and bondholders and the complex nature of the loans, “it may be that no successful restructuring solution can be achieved for either securitisation”.
Profitability at Punch has also taken a turn for the worse. Weaker trading across the total estate of some 4,100 pubs meant pre-tax profit for the year to August 17 slumped to £17m, from £52m in the previous year, despite income from the “core” pub estate of 2,874 pubs growing by the end of the year.
Stephen Billingham, executive chairman, said: “The investment in the core estate is now bearing fruit.”
Punch is steadily becoming a smaller group as it looks to dispose of some 1,200 pubs classified as non-core. The pub company offloaded 433 pubs during the year, raising £149m from the sales, a portion of which went towards reducing the debt pile.
Shares in Punch Taverns have performed strongly this year, almost doubling from 7.6p at the end of 2012.
However, the statement from Punch management should send a chill down the spine of any investor thinking of making a quick gain from a recovery. The fate of Punch is now largely in the hands of the lenders. That makes any investment in Punch Taverns equity an extremely high-risk option.
The lenders could decide on extremely harsh terms in any restructuring, wiping out any value currently left in the equity.
Questor thinks investors should call time on any investment and take what they can. Sell.