“The next few days will be some of the most important in the company’s history.”
This was the stark warning from Stephen Billingham, executive chairman of UK pub group Punch Taverns on February 5.
The company faces a bondholder vote on the proposed restructuring of its £2.3 billion debt pile on February 14 – a vote the firm has said will trigger a default on the bonds if it does not pass.
“The board believes that the restructuring proposals deliver more value for all noteholders than default,” insisted Billingham. “Everyone has something to gain by voting for the proposals.”
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| Stephen Billingham, executive chairman of Punch Taverns |
He said that the proposals would deliver a capital structure with material deleveraging of senior notes and enhanced junior note PIK interest. “Although they would result in debt to ebitda of around nine times and an interest expense of around 9% per annum, which is at the upper limit for a pub securitization, the board believes that they would provide a stable capital structure,” he claimed. Many would disagree that a debt-to-ebitda multiple of nine times translates into a stable capital structure and many of Punch’s lenders are among them. The senior noteholder committee formed under the auspices of the ABI rejected the final restructuring proposals shortly after they were released on January 15.
Together with three junior creditors they announced on January 27 that: “The creditors and their advisers have carefully considered the revised proposals issued by Punch and the related legal documents made available,” they said. “They are unable to support these proposals [in relation to either securitization vehicles Punch A or Punch B] and accordingly will vote against the proposals at any meetings of the issuer companies.”
The majority of the firm’s senior debt is understood to be in the hands of a group of large institutional investors: Aviva, Kames Capital, M&G, Legal & General, BlackRock and Standard Life.
The junior creditors party to the announcement were Angelo Gordon, Oaktree Capital Management and Warwick Capital Partners. Significant stakes in Punch debt are also held by Glenview Capital Management, Luxor Capital Group, Octavian Special Master Fund, Aberforth Partners, Alchemy Special Opportunities Fund and Avenue Capital Management.
“It is well known that certain creditors with blocking stakes have said they do not support the proposals,” Billingham conceded on February 5.
“There are also other creditors with conflicting views who have blocking stakes. We have tried to listen to everyone and find a middle way. While it is not possible to accommodate all of the conflicting views, Punch has attempted over a 14-month period of engagement and at significant financial cost and management time to find a balance between these conflicting views.”
The latest restructuring proposal, which was set out after the firm’s December 9 announcement of its intention to lay out final terms, is the fourth attempt to get the company and its lenders to agree.
Punch has habitually threatened to default on its £2.3 billion of outstanding debt, held in Punch A and Punch B, if bondholders do not consent to its plans, and that threat was reiterated again in the latest scheme.
“The restructuring proposals are final,” the firm declared in a statement. “Failure to effect a restructuring is expected to lead to default in the near term at which point securitization cash resources [used to facilitate the restructuring] are expected to be severely depleted with the mandatory prepayment of £188 million of available cash to Class A notes at par and loss of the £52 million group cash contribution.”
Punch and its lenders have been playing a game of chicken over this massive restructuring of its debt load for some time now. The vote is set to take place on February 14 and given the creditors strongly worded announcement, it now seems inevitable that the plans will be rejected.
One source close to the bondholder group does not mince his words. “The deal on the table fails on three counts: the commercial terms are unacceptable to multiple groups of lenders; the structure of the new notes is flawed; and the documentation is unsignable,” he declares.
Punch needs 75% approval from all 16 groups of its lenders for the deal to go through. Punch’s junior debt is in the hands of specialized distressed debt funds, not traditional whole business securitization buyers, but the seniors are not going to roll over without a fight. The £2.3 billion question is whether Punch will pull the trigger and default.
The Punch situation has always been an interesting case study in the conflicts of interest between investors owning different and multiple securities classes in a restructuring. Many of the funds that hold substantial amounts of the subordinated debt also have large equity stakes. This has given them greater heft in the restructuring negotiations.
Before this latest proposal, Punch had put forward a scheme in February last year which envisaged the paydown of Punch B junior debt alongside a five-year extension on the senior debt with covenant amendments and deferred amortization.
Unsurprisingly, this junior-friendly scheme provoked fury among the senior bondholders, and the new proposals seek to mend some fences. The restructuring plans now offer fixed or target amortization schedules on all senior notes. The new final maturity dates for each class of notes has been set to minimize the change in WAL from the existing Class A notes.
For the Punch A securitization, the new plans see the Class A notes reinstated – 70% fixed with a contractual amortization profile and 30% with a variable amortization profile – while the Class M to D notes will be cancelled via a mix of £120 million of cash and around £320 million of new Class M notes and £186 million of new Class B4 notes.
The coupon on the variable A2 notes will rise from 7.2% to 7.32%. The new B4 notes will offer a PIK coupon of 11% – an increase from the originally proposed 9%.
Payouts on the subordinated debt range from 95% of par for 24% of the Class M1 notes to 62.5% on 36.5% of the Class B1 and B2, 52.5% on 43.4% of the B3, 25% on all of the C notes (up from 20%) and 12% (up from 10%) on the entire tranche of Class D notes in the existing securitization.
For Punch B, Class A3, A6 and A7 notes are being reinstated while Class A8 notes will be paid down at par and hedge break costs covered using £54 million cash from the structure. £112 million new Class B3 notes are to be issued to replace Class B1, B2 and C1 notes. These new B3s will now pay a coupon of Libor plus 4%, plus 2.5% PIK.
One party to the deal that will be very keen to see the restructuring pass the vote is monoline insurer Ambac, which wrapped the A2, M2 and B3 notes in Punch A. It will pay £12.5 million cash to the restructuring to terminate the wrap early. It will not be entitled to any subsequent contractual make-whole payments.
James Martin, analyst at Barclays, says the proposal for Punch A looks like a transfer of upside in the recovery of the Punch Group from junior bondholders to equity because of the write-off in the Class B, C and D bonds. The Class B bondholders in Punch A face a write-off of 37.5% without being offered equity as compensation.
However, they do receive an upfront cash payment of 23% of par and 11% and 29% in the new M3 and B4 notes respectively. There is significant cross-holding between equity and junior bonds in the Punch B structure, so this transfer of upside should not be an issue for that deal.
Failure to agree the restructuring could lead to repayment at par for £123 million Class A bondholders in Punch A and £65 million in Punch B. Given that both classes of bonds are trading above par, this could be an incentive for the senior bondholders to agree to the restructure. However, the amount of cash required to effect the deal is a concern for many bondholders.
“The PLC is selective about the information it’s using to promote its deal,” says one. “They say senior leverage decreases – in fact net senior leverage in Punch A increases as a result of the company’s cash being paid out.”
Comments from investors since the latest proposals were made public have indicated that senior approval is far from certain. The ABI committee of senior noteholders has consistently complained about lack of interaction with the company and it seems they did not have any prior knowledge of the terms of the deal before its announcement.
That is simply rubbing them up the wrong way. There is £188 million of excess cash in the securitization structures so many senior noteholders remain to be convinced it is imperative for the restructuring to be forced through now – particularly as the group’s trading performance is showing signs of improvement.
The sense of grievance among many Punch lenders remains palpable as does the sense that shareholders – many of which also have positions in other parts of the capital structure – have had undue influence on the structure and are getting off lightly.
“By refusing to put any equity on the table, Mr Billingham is having to use all the company’s cash to buy off the junior bonds, weakening the company,” says one bondholder. “It is obvious this company requires a big equitization of junior debt. How many restructurings do you see where the shareholders take no dilution whatsoever?”
All this to-ing and fro-ing is getting expensive, and restructuring costs for the two securitizations are £20 million and counting. It is little surprise that Punch is threatening default to get bondholders to agree the deal and close the process.
“Failure to effect a restructuring will lead to a default in the securitization, which is expected to have a material negative impact on the business,” Billingham warned on February 5. “Punch has a very good underlying business with a positive future and its assets provide a focal point for 4,000 communities across the UK.
“Just as Punch’s operational performance is turning the corner, the last thing the business needs is for continued uncertainty. The restructuring would provide certainty and stability for the business from which all stakeholders will benefit.”
He added: “In the next few days, stakeholders have it in their hands to vote in favour of the restructuring proposals to end this uncertainty.”
They certainly do, but might feel that a little more uncertainty is worth it to get what they feel is a fairer deal.
One bondholder suggests that the January 15 announcement was an unwelcome surprise for lenders who were hopeful of a different outcome. “It’s time to reopen negotiations and finalize the sustainable solution for the business that was emerging in the new year before the shareholders stopped the talks,” he says.
Punch Taverns is being advised on the restructuring by Andrew Wilkinson and Sarah Mook at Goldman Sachs and Martin Gudgeon and David Riddell at Blackstone. Rothschild is advising the bondholders.
