Drinkers and Lenders Alike Lament Closure of British Pubs

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The closure of Britain’s pubs amid the Covid-19 pandemic is hurting not just the nation’s drinkers but also the companies that own them and the lenders who back them.

Marston’s Plc, owner of about 1,400 pubs including the Pitcher & Piano brand, andMitchells & Butlers Plc, with about 1,700 pubs including All Bar One, both agreed temporary waivers with creditors this month because pub closures risked breaching debt terms. If the lockdown lasts much longer, the companies may be at risk of breaching meaningful covenants on their debt.

“Depending on the length of the shutdown we can expect more significant waiver requests concerning financial covenants in time,” said Martin Foden, head of credit research at Royal London Asset Management which holds some pub debt.

Spokeswomen for Mitchells & Butlers and Marston’s declined to comment for this article.

There’s little light at the end of the tunnel. Social distancing will be needed until at least the end of the year to prevent fresh outbreaks, Chris Whitty, the U.K.’s Chief Medical Officer said this week. In response, the British Beer & Pub Associationwarned that pubs will be lost if the government doesn’t provide special support for them to reopen.

“Trade will not immediately return to the level it was before the Covid-19 crisis hit,” Emma McClarkin, chief executive of the association, said. “Upon reopening, trade could be down by as much as half what it was before.”

From the 1990s onwards, many pub companies issued highly-rated, long-term debt that was backed by cashflows from the pubs themselves. The notes have strict covenants designed to keep cash in the structure, according to CreditSights.

Some of these securitizations came unstuck with the smoking ban and the availability of discounted alcohol at supermarkets, part of the reason Punch Tavernsrestructured its debt in 2014.

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Lately the notes have become more attractive with a spate ofmergers and acquisitions including Hong Kong billionaire Li Ka-Shing’s purchase of Greene King last year and Stonegate’s acquisition ofEi Group. Moody’s Investors Service downgraded debt ratings on Mitchells & Butlers and Punch Taverns this week.

Now the lockdown looks set to turn things sour for investors. S&P Global placed debt from pub companies including Marston’s, Mitchells & Butlers and Greene King onnegative watch this month, signaling downgrades are likely as the shutdown restricts cash flows.

Punch Taverns asked bondholders to look at last year’s earnings figures when assessing debt covenants, GlobalCapitalreported last week. The company didn’t respond to an email request for comment

Investor Leniency

Mitchells & Butlers agreed a month-long waiver with lenders on April 14. In a statement the pub companywrote that there is still “great uncertainty” around the length of the shutdown and the nature of any reopening and recovery period, but it has enough cash to meet obligations “well into” the second half of the year.

Marston’sgained some breathing room until May 29 which can be automatically extended to June 15, according to a statement earlier this week. The company’s debt includes a provision where it can be deemed in breach if its operations are suspended for 30 days.

More negotiations may be required. Marston’s said it’s reviewing whether there is a need to consult with bondholders about further covenant waivers due to the impact of the lockdown.

When it comes to further requests for leniency, Foden at Royal London says he will take into account the severity of the crisis the banks face, while also thinking about end investors.

“We will consider these constructively, recognizing the extreme nature of recent events, whilst preserving our clients’ exposures,” he said.

— With assistance by Tasos Vossos

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