Punch owes a debt of gratitude to its publicans

The protracted negotiations to downsize the company’s £2.3bn of gross debt (circa £500,000 per pub, each with a book value of around £500,000) into something more manageable have taken, to date, the best part of two years, and involved some extraordinarily high-stakes brinkmanship.

We don’t need to dwell for too long on the well-documented reasons for the need for this piece of financial re-engineering. Essentially Punch Taverns took on too much debt during its pubs-acquisition splurge — to the point where the company struggled to service that debt without starving the business of much-needed investment.

That its debt also ended up parcelled into two extremely complicated securitisations involving many different investors hasn’t helped the company extricate itself from the situation. Debt management has been a distraction from the day job.

Haircut​

It was at Punch’s annual results in October 2012 that it first went public with its intention to engage “with certain major shareholders and other significant stakeholders to seek their input on the range of possible options available to restructure the securitisations”.

And it subsequently declared itself “confident of imminent restructure in first half” of 2013. The initial proposals, calling for bondholders to take a ‘haircut’ on their debt finance, were spurned in March of that year, leading to revised proposals in June and further rejection.

In December 2013, new plans were unveiled by Punch, described by the company as “final” and accompanied by a threat of administration if they were not accepted. They were not, but Punch lived on, thanks to a waiver of debt covenants.

Finally in May 2014, the company changed its offer from pure debt cancellation to a debt-for-equity swap that will reduce the amount owed by £600m. And that seems to have made the breakthough, finally securing agreement from the influential committee representing the majority of bondholders.

That’s not quite the end of the story, as there are other stakeholders who must agree to the plans, but it seems a deal will be done.

Shenanigans​

Now I don’t pretend to understand all the finer detail of this. I’ve read lots about it, and I’ve had some very clever and patient people try to explain it to me, v.e.r.y. s..l..o..w..l..y... but it still makes my brain hurt. It’s easier, more meaningful and more important to think about what this means for Punch’s circa 4,000 tenants who have themselves watched all these high-finance shenanigans from the sidelines — powerless to influence the process.

They wanted to know if their deposits were safe in the event of a default. They wanted to know whether they could buy their pubs if the company went bust. And most of all, they pondered whether it was fair that so much of their endeavour was being used to pay off a massive debt burden not of their making.

All reasonable questions. And all partially answered — with some significant caveats — by the financial restructuring deal.

Doubts remain, but Punch’s future looks more secure today than it did last week. And that quite simply has to be a good thing for the pub industry.

Punch may soon owe less debt to its financiers, but it will owe a greater debt of gratitude to its publicans for seeing it through this crisis.

Let’s hope they make more than a footnote in those Masters degree dissertations.