Punch Taverns has fired a warning shot to bondholders that it may hand back the keys to 5,000-plus leased pubs, unless they offer flexibility on debt repayment, observers believe.
The company's two leased securitisations stand to become a cash drain on the company of around £40m a year next August; they are broadly cash neutral at the moment.
The company is reported to have appointed bank Goldman Sachs and asset management firm Blackstone to advise on its options, which include a "default" on its lease securitisations as well as persuading securitisation bondholders to re-schedule the existing debt structure.
The suggestion that Punch management may allow a default on the two leased securitisations — effectively handing back the keys — was reported in the Sunday Times at the weekend. Some observers believe the story is an attempt to focus bondholders' minds on the consequences of refusing to renegotiate existing debt structures.
Michael Cox, of UBS European, who is regarded by some as the best analyst of the debt markets, thinks the bondholders should make concessions to retain Punch's management of the 5,325 leased pubs in the two securitisations that stand to become a cash drain on Punch. He said: "The more we analyse the deals, the more we think that the status quo is not an option.
"However, our view is that Punch has little to lose by trying to engage with bondholders on restructuring options before considering the nuclear option of allowing a default on Punch A and/or Punch B and walking away from the pubs.
"While the deals are structured to be able to withstand the insolvency of the borrower, and therefore investors are in a relatively strong position, the better solution is likely to be one that retains a motivated and capable equity sponsor. However, the difficult question is whether the concessions necessary to achieve that are a step too far for bondholders."
Punch chief executive Ian Dyson is undertaking a strategic review due to be made public in January.
Some analysts believe that Punch has nine months to negotiate concessions from bondholders. A default on the leased estate securitisations would allow Punch to focus on its managed estate, where there is still equity value for shareholders and growth prospects.
Last week, Douglas Jack, of Numis Securities, said that any "option value" in the leased estate "rests on the possibility of management successfully renegotiating the bond debt down to a realistic level" — he suggests a compromise with bondholders could be to extend the life of existing bonds, thereby stretching out the amortisation profile.
Jack stressed there were only two options for Punch management — to renegotiate the terms of the A and B bonds with bondholders to prevent the further loss of equity or, more realistically, to "de-merge the A and B bond (leased) estates" to create a "fast-growing, stand-alone managed pub investment vehicle".