Debt Funds Get Last Laugh in Punch Taverns Brawlby
If Heineken's proposed acquisition of about 1,900 Punch Taverns pubs goes through, a group of debt funds can claim victory in one of the toughest restructuring fights of recent years.
The U.K.-based company's securitized bonds, whose value totals more than 1.3 billion pounds ($1.6 billion), are in focus because many British pubs are, financially speaking, beer-selling devices engineered precisely to support a steady stream of cash flows to noteholders.
Punch's founders were among the first to realize that the technique of whole business securitizations — that is, selling debt backed by a single vehicle that takes into account the value of both a firm's assets and its cash flows — could be applied to finance the acquisition of the thousands of pubs being offloaded by brewers in the 1990s. In a 1989 ruling, regulators had taken aim at beermakers' control over drinking establishments, and forced many to change hands.
In 1998, Punch's founders raised more than half a billion pounds of debt from investors in asset-backed securities to support the purchase of 1,400 or so pubs from brewer Bass plc, in a securitization deal known as "Punch A". It is the Punch A portfolio that Amsterdam-based Heineken NV proposes to take over.
Punch later tacked on more groups of pub, backed by two further securitizations (known as "Punch B" and "Spirit") and after the company was publicly listed in 2002, its share price soared.
The stock crashed from mid-2007 as the value of indebted, securitization-funded companies evaporated post crisis. The firm's earnings were also pummeled by an indoor smoking ban which kicked in around the same time and helped to keep drinkers away. Amid these constraints it took time for a debt restructuring to come to fruition, with the company first spinning off its Spirit group of pubs in 2011 before a formal process was initiated the following year.
By this time Punch Taverns was a big focus for distressed-debt investors, with major industry players seeking to identify an investment strategy that would generate profit from the company's complex capital structure. By 2013 a group of funds including Glenview Capital, Avenue Capital and Luxor Capital had taken control of most of the junior debt in one of the securitizations, and had bought more than half of its shares.
Senior bondholders formed a group to protect their interests, and repeatedly pushed back on proposals made by the company in a protracted battle about who would shoulder the losses, before parties came to an agreement in the latter part of 2014. The final deal forced bondholders to accept a loss on 600 million pounds of debt, with seven funds taking up the offer of newly issued notes and shares — Glenview and Luxor foremost among them.
Now, little more than two years later, Patron Capital and Heineken have teamed up on an offer that values Punch Taverns Plc at more than 400 million pounds. A vehicle set up by Patron has agreed to buy the whole company then immediately sell the Punch A portion to Heineken for 305 million pounds. Punch's shares soared 50 percent on the news.
Punch's top shareholders, Glenview Capital, Avenue Capital and Warwick Capital, who now together hold just over 50 percent of the company's equity, back the deal. Senior bondholders have seen some appreciation in their assets, but only a fraction of that of equity. Those funds that went into the equity and debt through the restructuring, and for whom a successful exit will likely have been a big goal in that deal, might be forgiven for being in pretty good cheer this holiday season.