New Covid Curfew Another Setback for U.K’s Indebted Pub Sector
2020-09-28 12:52:35.116 GMT
By Katie Linsell and Libby Cherry
(Bloomberg) — For the U.K.’s indebted pub companies, a new
10 p.m. curfew doesn’t just dent sales, it weighs on their debt
loads too.
Bonds issued by Stonegate, the heavily leveraged owner of
the Slug & Lettuce, Walkabout and Yates’ chains, have fallen to
the lowest since they were sold in July. A risk gauge on the
company’s debt indicates investors see a 57% likelihood it will
default in five years, according to ICE Data Services.
Bonds of other large pubcos Marston’s Plc and Mitchells &
Butlers Plc have also slid as investors fret.
“Pub debt is a difficult sell at the moment,” said George
Curtis, a credit analyst at TwentyFour Asset Management in
London. “We remain cautious on sectors which are highly cyclical
and most exposed to further lockdowns.”
The U.K’s highly-competitive hospitality sector is already
struggling. Restaurant chains Carluccio’s and Azzurri Group,
which owns Zizzi and ASK Italian, collapsed into administration
earlier this year as customers dine out less.
New economic support measures announced last week by U.K.
Chancellor of the Exchequer Rishi Sunak have been largely
shrugged off by pubs, restaurants and their lenders alike.
“Hospitality needs more targeted efforts to support jobs,”
Kate Nicholls, Chief Executive of industry lobby group U.K.
Hospitality, said in a statement after the measures. “We are
still not out of the woods.”
Greater Manchester Mayor Andy Burnham warned Monday that
the curfew is at risk of backfiring because it means young
people are gathering to drink in the streets instead.
For Stonegate, Covid-19 couldn’t have come at a worse time.
The TDR Capital-owned company, which runs more than 700
pubs and bars across the U.K., recently took on 2.5 billion
pounds ($3.2 billion) of debt to fund the takeover of rival EI
Group.
Even before the curfew was announced, Stonegate told
investors that it was at risk of breaching debt terms in July
next year if sales were lacklustre, and a second lockdown could
trigger an earlier breach, according to a Sept. 22 report from
research firm CreditSights.
Sales at the company’s city-based pubs would likely fall
about 16-17% due to early closing, CreditSights analysts wrote,
citing Stonegate management.
“The leverage is going to keep on increasing, so I am quite
negative on the company,” Nicholas Campello, a credit analyst at
Spread Research in Lyon, said. The company declined to comment
for this article.
In the bond market, Marston’s and Mitchells & Butlers notes
have fallen in recent months. The companies already agreed
waivers with creditors this year because pub closures risked
them breaching debt terms.
The curfew and risk of a second lockdown may call for more
leniency from lenders down the road. Curtis at TwentyFour Asset
Management expects investors to continue to be “amenable” as
demand slowly returns.
Marston’s declined to comment for this article. Mitchells &
Butlers pointed to comments made by Chief Executive Phil Urban
last week that the future outlook is “challenging and uncertain”
but the company is “well placed” to meet the challenge.
For Martin Foden at Royal London Asset Management, it’s
best to be invested in senior-ranking bonds in low-leveraged pub
deals, as they are better placed to absorb lower revenues while
still offering higher yields.
“Arguably, food-led spaces will fare better than wet-led,
city-center establishments,” said Foden, the firm’s head of
sterling credit research. “Uncertainty is definitely on the rise
and this demands more acute selectivity when investing in pub
bonds.”