Punch Taverns restructuring plan faces criticism

http://www.guardian.co.uk/business/2013/feb/07/punch-taverns-restructuring-plan

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A complex restructuring plan for Punch Taverns, the debt-laden landlord group that owns almost one in 10 British pubs, is likely to face criticism from senior bond holders who doubt the company's claims that it will create a "sustainable capital structure".

Proposals from chairman Stephen Billingham, who is advised by Blackstone Group and Goldman Sachs, are likely to split opinion among Punch stakeholders, pitting traditional institutional investors, who own most of the company's senior debt, against a small group of US hedge funds, which control large equity stakes as well as major holdings in junior bonds.

Punch, which leases pubs and arranges beer supply, only officially recognised it would need to restructure its £2.4bn debts to avoid insolvency in October last year, though senior bondholders have been publicly calling for a radical restructuring since March 2011.

Billingham has now drawn up that restructuring and among the most controversial aspects is a plan to use £93m of cash reserves to help finance the repurchase of junior bond notes. Although it is proposed this be done at a discount to the face value of the notes, critics of Billingham's plans suggest Punch's overall borrowings are so unsustainable that the fair value of these junior notes ought to be little or nothing.

Many of those junior debts targeted for repurchase are held by hedge funds which also appear on the share register which may give them an incentive to support the deal. Asked if he felt this was a conflict of interest the Punch chairman said: "They [the US hedge funds] are not alone, so we can't do anything in isolation with them. There is probably enough variety and diversity in the structure to ensure to ensure that any conflicts, if there are any, can be overridden by the majority of people."

For the restructuring to succeed, the proposals must win 75% approval from each class of stakeholders within Punch's complex capital structure. There are 16 classes of bondholders as well as bond insurers and shareholders. It is thought that senior bondholders are already poised to block the plan.

Rather than being an agent for narrow shareholder interests, Billingham insisted his role was that of a "ringmaster", looking for a deal that works for all stakeholders in the former FTSE 100 group.

Punch's once celebrated capital structure was designed in the noughties to allow large, long-term bonds to be issued against a business with very reliable cashflows. However, the architects did not anticipate the sharp reduction in trading following a smoking ban, rising beer duty, supermarket lager promotions and the onset of a recession.

Since a series of profit warnings in 2008, Punch shares have collapsed reflecting uncertainty about the sustainability of borrowings. Its share value is now less than £90m. In contrast, the group's two pub estates, Punch A and Punch B, contain borrowings of £1.48bn and £914m respectively.

Billingham's proposals are likely to enrage senior bondholders who have long held that Punch's capital structure is in need of far more radical surgery. About half of bondholders, many of them traditional institutional investors, are represented by the special committee convened under the auspices of the Association of British Insurers (ABI). They have hired Rothchilds as advisers and believe nothing short of a massive rights issue or a debt-for-equity swap is required to put the business on a truly sustainable footing. Billingham said shareholders would not support that option.

As well as buying back junior notes, Billingham is attempting to pressure bondholders into loosening terms and pushing back the date at which Punch must start paying down the principal on its borrowings.

Senior bondholders are also concerned that the chairman's plans involves a proposal by which the group could use a portion of proceeds from pub disposals to eventually pay dividends to shareholders — something they regard as unlikely to be appropriate given levels of borrowings.

Punch has only escaped defaulting on its borrowings in recent years by dipping into fast-depleting cash reserves to avoid Punch A and B breaching the terms of borrowing agreements and slipping into the hands of bondholders. The cash reserves are the legacy of a controversial £375m equity raising three years ago.