January 10, 2013 / 3:52 PM / 5 years ago

TEXT - Fitch affirms Greene King Finance plc

Jan 10 - Fitch Ratings has affirmed Greene King (GK) Finance plc’s class A, AB and B notes at ‘BBB+', ‘BBB’ and ‘BBB-’ respectively. The Outlook on all the notes is Stable. A full list of rating actions can be found at the end of this release. The affirmation is driven by the solid performance of the borrower’s (GK Retailing Limited (GKR)) total estate over the past year with October 2012 trailing-twelve-months (TTM) EBITDA rising by 4.6% to GBP187.3m (8.3% on a per pub basis), and also takes into account the upward trend in performance over the past few years (with four-year EBITDA per pub compound annual growth rate (CAGR) at 4.6%) despite the continuing weak UK economic environment and difficulties faced by the UK pub industry (such as reduced discretionary spending, off-trade competition, rising operating costs and alcohol taxation). The Stable Outlooks reflect the expectation that the relatively high quality estate and proactive management will continue to deliver stabilised performance over the next two years. GKR has overall outperformed Fitch’s base case by 4.9% primarily as a result of the growth in the managed division with October 2012 TTM EBITDA up by 11.2%. This increase was driven by higher turnover growth (which continued to be led by food sales with GK plc’s annual food like-for-like (LFL) sales growth at 5.6%), lower opex growth (with GKR benefiting from its operating leverage) and an increase in the number of pubs within the managed estate (with 24 net acquisitions and 12 conversions from the tenanted estate during the previous 12 months representing an average annual increase of 3.1%). On a per pub basis, the managed estate annual EBITDA increased by 7.9% to above GBP0.2m (overtaking Marston‘s, but remaining below Mitchells & Butlers’ GBP0.25m, both being GKR’s closest peers). At group level (which is a good proxy for the securitised estate), continuing solid LFL revenue growth within the managed division, with 2.3% 10-year CAGR and 3.6% growth in 2012, further supports the affirmation. The tenanted estate partially negatively offsets the managed division’s performance with October 2012 TTM EBITDA down by 3.8%. This was however partly driven by disposals and conversions as the number of pubs declined by (on average) 5.8% over the past year. On a per pub basis, performance improved as smaller, weaker pubs were disposed of, with GK plc’s October 2012 TTM LFL net income falling by less than 1% reflecting the on-going stabilisation. In terms of strategy, GKR has continued to successfully dispose of underperforming pubs, selling 90 in the past 12 months. Greene King has also continued to roll out its franchise style agreements, with final numbers of 50 to 100 targeted. These have reportedly been successful so far, with an average up-lift in profit of ca. GBP35,000-40,000, and will continue to be used when appropriate. Fitch’s base case managed and tenanted division 23-year (to legal final maturity of the notes in 2035) EBITDA CAGRs are mildly positive and negative respectively, and result in a combined forecast CAGR of below 1.0%, while free cash flow (FCF) is expected to decline slightly due to the increasing maintenance expenditure and tax expense (as interest payments reduce over the life of the transaction). These forecasts result in Fitch’s base case FCF debt service coverage ratios (DSCRs) to legal final maturity improving slightly versus the last performance review, to around 1.9x, 1.8x and 1.6x for the class A, AB and B notes respectively. With regard to the class B notes, the improvement alleviates the negative pressure on the ‘BBB-’ rating, hence Fitch’s revised Outlook to Stable from Negative. In terms of financial structure, all classes of notes are fully amortising. There is some concurrent amortisation of the class A4 and A5 notes with the class B1 notes, in addition to the class B1 notes’ maturity being before the class AB1 notes. This is however mitigated by the possibility to defer interest and principal payments for the junior notes while the senior notes are outstanding without triggering a note event of default. There are also step-up fees coming into effect in June 2013, however, these are subordinated and the ratings do not address the payment of these amounts. The transaction also benefits from a comparatively even debt profile to maturity. A shift in Fitch’s base case FCF DSCR metrics to above 2.0x, 1.9x and 1.7x for the class A, AB and B notes respectively could trigger a Positive Outlook or upgrade. Conversely, any deterioration below around 1.8x, 1.7x and 1.5x for the class A, AB and B notes respectively could trigger a Negative Outlook or downgrade. GK Finance plc is a whole business securitisation of a portfolio of 571 managed as well as 1,300 tenanted and leased (referred to as tenanted) pubs located in England, Scotland and Wales. The securitised pubs represent around 81% of Greene King Group’s pub portfolio and are considered a reasonably representative sample of the total estate. The rating actions are as follows: GBP145.6m class A1 floating rate notes due 2031: affirmed at ‘BBB+'; Outlook Stable GBP252.1m class A2 fixed rate notes due 2031: affirmed at ‘BBB+'; Outlook Stable GBP111.1m class A3 floating rate notes due 2021: affirmed at ‘BBB+'; Outlook Stable GBP258.9m class A4 fixed rate notes due 2034: affirmed at ‘BBB+'; Outlook Stable GBP266.8m class A5 floating rate notes due 2033: affirmed at ‘BBB+'; Outlook Stable GBP60m class AB1 floating rate notes due 2036: affirmed at ‘BBB’; Outlook Stable GBP120.9m class B1 fixed rate notes due 2034: affirmed at ‘BBB-'; Outlook revised to Stable from Negative GBP99.9m class B2 floating rate notes due 2036: affirmed at ‘BBB-'; Outlook revised to Stable from Negative

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