Punch Default Seen as No Loss by Senior Bondholders: U.K. Credit

Punch Taverns Plc’s senior note holders are resisting the company’s pleas to back a 2.3 billion-pound ($3.8 billion) restructuring because the bonds would survive a default.

The most senior notes, some of which the company said will be repaid at face value if terms are breached, are trading at about 105 percent as creditors hold out for a better deal. A committee of bondholders spurned three offers from the pub operator since negotiations began in October 2012 and say they’ll reject final proposals at a vote Feb. 14 because it’s too generous to lower ranking investors and shareholders.

The owner of more than 4,000 pubs made a last-ditch appeal yesterday for investors to back the latest offer, which includes cutting debt by canceling some notes in return for cash payments or issuing new securities. Talks have broken down between the creditor group and the company, according to Punch’s Executive Chairman Stephen Billingham.

“Everyone tells us they’re not afraid of default,” Billingham said in a phone interview yesterday. “Default is a very uncertain world. If you’re sitting in seniors, why would you run the risk of giving away 105?”

An official at Rothschild, the investment bank advising an investor committee, declined to comment on the negotiations. Bondholders in the group include Kames Capital Plc, Legal & General Group Plc, Prudential Plc’s M&G unit, Standard Life Plc and Aviva Plc, according to an investor conference call last year.

Sales Slump

Burton-upon-Trent, England-based Punch is trying to lower its debt burden after the pub industry suffered from the recession in the U.K. which exacerbated a decline in beer consumption following a smoking ban and competition from supermarkets selling discount alcohol.

A group of five hedge funds including Glenview Capital Management own more than 50 percent of the company’s equity and have backed its proposals. Punch shares fell 0.75 pence to 13 pence at 10 a.m. in London, the lowest level since Jan. 3.

Punch has 16 classes of notes across two securitizations, known as Punch A and Punch B, operated by independent boards. Bondholders say they have blocking positions in a number of classes. At least 75 percent of note holders in each class must support an offer for it to be accepted.

Liquidity Facility

Failure to reach agreement will prompt the company to stop injecting cash into the securitizations, which may cause them to breach conditions as soon as March and trigger a default, according to Billingham. A backup liquidity facility can continue paying coupons for years, though it doesn’t guarantee principal, he said.

There is more than 170 million pounds of cash contained within the two securitizations, Finance Director Steve Dando said in a teleconference Jan. 15. This would be used to repay some of the senior-ranking notes at par in case of a default, Dando said. Bondholders said Dec. 10 the cash should be used to fund a tender offer for some of the outstanding notes.

Bad publicity associated with a default will further harm the company’s business by deterring new tenants signing leases, Billingham said. It may also prompt current tenants to stop paying rents or buying their beer from Punch, he said.

“We’re already starting to see resistance from new tenants and the business model is critically dependent on new tenants,” Billingham said.

The people who operate Punch pubs are becoming nervous about the outcome of the standoff between the company and bondholders.

Chris Lindesay, who operates the 18th century Sun Inn in the Surrey, England, village of Dunsfold, said tenants are afraid they may lose their deposits.

“The problem is there’s far too much debt secured on a far too fragile income stream,” said Lindesay, who has run the pub since 2002. “A default may not be the worst thing.”

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