Rating agency Moody’s has said that Stonegate Pub Company’s deal for TCG is being financed with a £80m tap of its senior secured fixed rate notes due 2019, as well as sale-leaseback proceeds.
Yesterday, M&C revealed that Stonegate had agreed to acquire the 53 out the 62 pubs operated by TCG for an undisclosed sum, with the sites set to be migrated into the company’s seven trading formats.
Moody’s affirmed its ratings and loss given default (LGD) assessment of Stonegate Pub Company’s £340m senior secured fixed rate notes due 2019 and £140m senior secured floating rate notes due 2019 on the back of the deal. It said that the outlook for all ratings is stable.
It said: “Affirmation of the B2 corporate family rating reflects Stonegate’s relatively small size (665 units pro forma after the acquisition), limited operating history (established in 2010) and private company status. It also considers Stonegate’s material leverage of around 7.0x and modest coverage of approximately 1.3x, as well as limited retained cash flow.
“Counterbalancing these weaknesses, the UK pub industry is in the process of stabilization following a number of challenging years, and Stonegate is operating in the faster-growing and better performing managed (rather than tenanted) segment. Also positively, the issuance is supported by first liens on the majority of the company’s assets, and anticipated adequate liquidity. Since its initial rating in April 2014, Stonegate demonstrated positive like-for-like results, and prompt and profitable integration of acquired assets. We expect the company to follow a similar strategy with respect to the TCG portfolio.
“Stonegate’s leverage is elevated and coverage modest at approximately 7.0x and 1.3x pro-forma for the first year of operation following the transaction, respectively. Moody’s expects these metrics to improve as a result of growth in the sector, successful completion of the integration efforts and some margin expansion due to realized economies of scale.”
Moody’s believes that Stonegate’s liquidity will be adequate for the company’s ongoing operational requirements. The company is expected to generate positive free cash flow, although modest, and has an undrawn £25m revolving credit facility (RCF) with will be upsized to £50m for one year in conjunction with this acquisition. The revolver matures in 2018, one year ahead of the notes. The increased RCF will provide Stonegate with additional liquidity cushion.
Moody’s said: “The stable rating outlook reflects Stonegate’s success to date in acquiring and integrating a material portfolio of pubs throughout the UK while improving its KPIs. We expect the company to continue showing moderately improving coverage and leverage trends over time.”
