Enterprise Inns Finding Bond Favor as Debts Reduced: U.K. CreditColm Heatley and Peter Woodifield
Enterprise Inns Plc, the second-biggest U.K. pub operator, is finding favor with bond investors by eliminating unwanted outlets and reducing its debt burden.
“Debt continues to come down, a reduction of a billion pounds over three years,” Chief Executive Officer Ted Tuppen said in a phone interview yesterday. “The market sees us as a good bet. I don’t think anybody is worried about the security of bonds. We demonstrated to the market that wasn’t the problem they thought it was.”
The yield on the Enterprise Inns bond due 2018 tumbled to
6.03 percent from about 24 percent on March 2009, according to data compiled by Bloomberg. It’s the lowest yield since January
2008. The premium investors demand to hold the security instead of similar-maturity gilts narrowed to 5.14 percentage points from more than 13 percentage points in December 2011. The bond, rated BB- by Moody’s Investors Service had a total return of
36.1 percent in the past year, Bloomberg-compiled data show. The Bank of America Merrill Lynch BB-B Sterling High Yield Index had an equivalent return of 28 percent.
Enterprise Inns is reducing its debt since peaking at 3.8 billion pounds ($5.8 billion) in 2009, using spare cash and the proceeds from pub sales as the industry grapples with a slowdown in the economy, rising competition from cheaper supermarket alcohol and higher taxes on beer. Britain’s pub industry accumulated debt from acquiring outlets in the boom years a decade ago when consumer spending and pub attendance was increasing.
The number of pubs in the U.K. has fallen to an estimated 49,537 in 2012 from 60,100 in 2002, according to the British Pub & Beer Association. In 2002 pubs and restaurants accounted for 65 percent of alcohol sales, with the remainder coming from the off-trade, the trade body said. Alcohol sold in pubs and restaurants last year accounted for 51 percent of total sales.
Enterprise Inns bank debt net of cash fell 33 percent to 266 million pounds in the six months to March 31, the company said in a statement yesterday. Net debt fell by 200 million pounds to 2.7 billion pounds as of March 31 and should reach 2.5 billion pounds by Sept. 30, the Solihull, England-based company said.
“With Enterprise Inns you have a recovery story and progress reducing debt on its balance sheet,” said Thomas Rahman, a credit analyst at RIA Capital Markets Ltd. in Edinburgh. “Also on the notes you have them secured against a portfolio of pubs and they are valued at 72 percent on a loan-to-value basis.”
Enterprise Inns implemented a program last year to prepay and cancel bonds at its Unique Pub Finance Co. Plc, which has helped debt prices, Rahman said.
Since 2010 the company has sold about 1,100 pubs, taking its estate to 5,720 outlets. Enterprise Inns plans to sell 400 outlets this year to raise about 150 million pounds, a company spokeswoman said in response to e-mailed questions.
In December, Standard & Poor’s upgraded its outlook on Enterprise Inns credit to stable from negative, saying the pub company’s business is stabilizing.
Like-for-like net income fell 4.2 percent for the six months ended March 31, the company said yesterday, compared with a decline of 1.6 percent a year earlier. The results reflected heavy snowfall in January and a cold spring, which discouraged customers from visiting their local pub, the company said.
Enterprise Inns rose 9.9 percent, the biggest gain in almost six months to 108.8 pence as of 12:40 p.m. in London, giving the company a market value of 549 million pounds.
“We are holding our full year forecasts of both profit before tax and net debt falling 7 percent based on profits stabilizing in the second half,” Douglas Jack, an analyst at Numis Securities, wrote in a note to clients yesterday. “The company targets a return to like-for-like net income growth in the second half and is moving in this direction with trading improving to minus 1 percent in recent weeks.”
Punch Taverns Plc had proposals to restructure 2.4 billion pounds of debt rejected by bondholders in March because the plan didn’t address the business’s operational issues or provide a way for the debt to be refinanced or repaid. None of Punch’s bonds is due before 2020.
Deutsche Bank AG analyst Geof Collyer wrote in a note to clients yesterday that the outlook given by Enterprise for the second half reinforces its buy stance on the stock and the market should focus on its “recovery potential.”