City source: GMB Punch debt-for-equity call 'laughable'
A senior City source has dismissed the GMB's call for Punch Taverns to swap debt for equity as "laughable".
The GMB has called on Punch's board to discuss with its bondholders the conversion of its £3.5 billion debts to equity to ensure a more viable pub business.
Paul Maloney, GMB national officer, said "This analysis of the Punch published accounts leads GMB to conclude that chief executive Ian Dyson needs to follow the example of MGM and begin discussions with the bondholders to convert debts to equity to secure a viable future for Punch.
"I can not honestly say that I understand all the intricacies of the accounts but I do understand the mountains of debt and amount of red ink in the accounts of a company set up by debt junkies.
"The debts average £534,901 per pub and interest payment and costs linked to the loans amounts to an average of £271 per day per pub and is payable whether the pub is trading at a profit or not.
"These are trying times in the pub trade. It is essential that the interests of all the stakeholders are aligned to enable the major players to come up with an agreed strategy to stop the decline.
"This can not happen if most of the surplus income generated from trading is needed to pay the bondholders. It is time to unwind the financial engineering that has gone badly wrong."
The senior City source said: "The GMB's call is laughable — it doesn't understand basic finance. It's just a non-starter.
"Bondholders have no incentive to swap their debt for equity because they are protected in the case of a Punch default in that they keep the pubs.
"And the odds of raising £3.5bn of fresh equity are nil. The last rights issue was at 100p and the current share price is around the 60p mark.
"Given that the shares have lost 40% of their value, there's no way shareholders are going to dip into their pockets again."
City comment by The PMA Team
The GMB's call for Punch to reduce debt by asking bondholders to swap debt for equity is an unrealistic and somewhat naive suggestion.
The bondholders rights supercede those of shareholders under the current arrangement.
Equally, it's unrealistic to expect shareholders — existing or new — to stump up £3.5bn or even a much smaller amount given that the current share price is materially lower than the last rights issue price.
A more sensible way forward is a renegotiation by Punch with its bondholders to re-schedule debt.
