The group said that it would not be possible to launch these new proposals, or any consensual restructuring, prior to the deadline of 30 June and it was therefore likely that Punch A and Punch B will require “an extension to the covenant waivers to provide sufficient time to implement a consensual restructuring”.
The new proposals would result in a 26% reduction in total net debt, materially reducing financial risk but at the cost of equity dilution. It requires 75% approval from all asset classes including equity. The company has already got the support of seven junior bondholders, who also hold over 50% of the equity.
'Substantial progress'
It said that whilst the ABI Special Noteholder Committee is not currently signed up to the proposals, substantial progress has been made in addressing their issues.
Implementation of a consensual restructuring would require the consent of other parties outside of the Stakeholder Group, including shareholders, all classes of noteholders in Punch A and Punch B and other securitisation creditors. Accordingly, there can be no certainty that the proposals will proceed.
The proposals differ in a number of ways from the terms of the restructuring launched by Punch on 15 January. In particular, junior notes in Punch A and Punch B would be exchanged for a combination of not only cash and new junior notes, but also ordinary shares in the Company in a debt-for-equity swap. In addition, a group of junior creditors would subscribe for ordinary shares in the Company at a significant discount to the current market price to raise additional funds to be applied to repay junior notes in the Punch A securitisation.
Debt reduction
The company said: “The proposals would result in a reduction in total net debt of £600m. In consideration for the debt reduction, the debt-for-equity swap and placing contemplated by the proposals would result in significant equity dilution for existing shareholders, such that the company’s currently issued share capital would represent 15% of its total enlarged issued share capital following the restructuring.
“Were the proposals to be implemented, the reduction in net debt (including the mark-to-market on interest rate swaps) of £600m would result in the pro-forma net debt to EBITDA leverage of the Punch group falling to c.7.7x[1] at August 2014. Gross securitisation debt[2] of £1.58bn would have an effective interest rate of c.7.9% including PIK interest (c.7.1% cash pay interest).”
Douglas Jack at Numis said: “These terms are different to previous ones: they would result in a 26% reduction in total net debt, materially reducing financial risk but at the cost of equity dilution. This is all reflected in our revised forecasts and change of target price, to 10p from 11p. Due to the current 15p share price our recommendation moves to Sell, from Hold.
“Total net debt would fall £593m (with nominal net debt, ex-swaps, down £440m). Despite this, cash at PLC would be minimal and no equity dividends would be payable for the foreseeable future. We estimate nominal net debt/EBITDA should fall to 7.3x (2015E) from 9.3x at present.
“Core estate LFL profit (up 1.4% in H1) is forecast to rise 1% this 53-week year, 1-2% in 2015E and by 2% pa from 2016E, resulting in EBITDA stabilising at c.£200m and net debt falling by £80-90m pa, reducing net debt/EBITDA to an estimated 7.0x in 2016E. Our revised net income and cash flow forecasts are on pages 3 and 4.
“Our 10p target price equates to existing shareholders’ share of debt reduction or 9.6x 2015E EV/EBITDA. We estimate debt reduction should grow this equity value by 17% (1.7p/share) pa. This target valuation is at a slight discount to Enterprise Inns’ 10.0x EV/EBITDA even though Punch is outperforming on LFL profits, will have lower leverage, has no bank debt and should have no refinancing event.”