Statutory code: Ratings agency warns over impact on pubco profitability

24-Apr-2013 - Last updated on 25-Apr-2013 at 11:40 GMT

The implementation of a statutory code to protect the tenants of large UK pub companies from perceived unfair treatment would probably be negative for major tenanted pubcos' profitability in the short to medium term, according to ratings firm Fitch.

However, it said the the size of the impact on the sector remains unclear, while over the longer term proposed aspects of the code could help stabilise pubco cash flows as more affordable rents could reduce tenant failure rates.

It said: “We estimate the potential reduction in EBITDA of the major pubco securitisations could be 6%-8% for fully tenanted/leased pubcos (Punch Taverns and Enterprise Inns) and 2%-5% for mixed tenanted/managed pubcos (Greene King, Spirit, and Marston's), if the government's assumptions are borne out.

"The government estimates a cost impact of £102m per year for the pubcos, mainly as a result of profits being transferred to tenants. If this is correct, the average yearly cost increase per tenanted tied pub would be about £4,250 under the government's median case.

“We expect the average impact on current debt service coverage ratios in the affected securitised pub transactions to be low, from 0.1x for pure tenanted companies to around 0.05x for the tenanted/managed operators. However, we expect various factors to offset the cost impact to some extent.

"Major pubcos already claim to be partially or fully compliant with Royal Institute of Chartered Surveyors guidance on rent reviews under the self-regulatory code of practice. If so, the transfer of profits from the pubcos to the tenants might prove less than anticipated. Pubcos have already been reducing rents since the financial crisis and economic downturn took hold in 2008.

“So some of the necessary rent reductions - up to 30% in certain cases - may have already taken place. In addition, while the government has taken a significant step towards establishing a statutory code with the release of its consultation, it remains at the planning stage and the impact on profitability could differ from current estimates.

“We remain more concerned about broader pressures on the sector such as off-trade competition, reduced alcohol consumption, protracted macroeconomic weakness putting pressure on discretionary spending and socio-demographic changes that have reduced demand for traditional wet-led pubs in the UK.

“Overall the industry outlook remains negative, with most of the Fitch-rated whole business securitisation debt tranches on Negative Outlook.”