Punch Says It May Fail Covenant Tests Amid Debt Standoff

Punch Taverns Plc said its financing structures may breach financial covenant tests due tomorrow and a failure to conclude a debt restructuring will result in a default by May 15.

Punch has been negotiating with stakeholders since October 2012 to cut its 2.3 billion-pound ($3.85 billion) debt burden as the owner of more than 4,000 pubs seeks to combat a decline in sales. It extended a deadline for investors to vote on its restructuring proposal earlier this month.

The company has 16 classes of notes across two securitization financings, known as Punch A and Punch B. Failure to meet the second-quarter debt service coverage ratio on April 15 “would result in a default in the relevant securitization within a further 30 days,” the company said in a statement.

Debt holders have spurned four offers from the company since negotiations began, saying they’re too generous to lower-ranking investors and shareholders. Punch, based in Burton-upon-Trent, England, had proposed cutting debt by canceling some notes in return for cash payments or issuing new securities.

“Failure to effect a restructuring in the near-term will lead to a default in both the Punch A and Punch B securitization, which is expected to have a material negative impact on the business,” Punch said in the statement. “It is in the interest of all parties to agree a consensual restructuring ahead of the next covenant reporting date” and “to put in place a sustainable long-term capital structure for the securitizations.”

Creditors are preparing an alternative plan that was described earlier this month as “well advanced” by a person with knowledge of the matter, who asked not to be identified because they’re not authorized to talk about it. At least 75 percent of note holders in each class must support an offer for it to be accepted.

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