As the pub sector moves into 2009, survival is the name of the game. Most quoted pub companies loaded up on debt during the credit boom and now are paying the price. The industry has traditionally been seen as a fairly defensive bet but it's not immune from the downturn. According to the British Beer and Pub Association, pubs' beer sales are falling at an annual rate of 8.1 per cent and 36 pubs are closing each week. These grim trading conditions coupled with giddying debt mountains make for a potentially killer combination for shareholders. The value of shares in the major pub groups have plunged and both Punch Taverns and Mitchells & Butlers have pulled their dividends in response to the worsening conditions.
The debt has the effect of magnifying the impact of falling profits and asset values on shareholders because the amount owned and paid to lenders remains the same regardless of trading conditions. An additional risk for pub company shareholders is the way debt has been raised – through securitisations. These arrangements usually require cash flows to become restricted in order to service debt if trading deteriorates to a pre-agreed extent.
On the plus side, securitisations have provided the industry with the kind of long-term financing many business would die for in this post-crunch world – it's just a shame some of them may have taken on too much of it. "Securitisation is a great form of financing to have," says KBC Peel Hunt analyst Paul Hickman, "provided it works and you don't breach your covenants, that is."
A lot depends on how bad things get after Christmas. This is always a quiet period for the industry, but there may not be a lot of fat to live off. The picture is especially uncertain for the big tenanted pub groups because the underlying circumstances of tenants is hard to gauge until they run into trouble. Behind the relative strength of recent figures reported by the likes of Punch and Enterprise, analysts fear there could be a legion of tenants on the brink of going out of business.
Still, for those that get through this without resorting to big fund raisings or worse, the upside from a recovery could be substantial. Mitchells & Butlers' proactive moves to pay down debt and its hands-on managed pub approach make it an interesting, although risky, prospect from this perspective. Meanwhile groups like Fuller, Smith & Turner and Young's have very conservative balance sheets and are in an enviable position to cherry pick pubs from forced sellers. We're sellers of Punch Taverns, Enterprise Inns and JD Wetherspoon.
