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The financial challenges facing the pub sector have been vividly illustrated over the last few months by the case of the Stonegate Group.

The UK’s largest pub and bar company, which has more than 4,400 venues, including the Slug & Lettuce and Be At One chains, has maturing debt totalling around £2.2bn.

Stonegate acknowledged in its filing with Companies House last month that “the company and group may be unable to realise their assets and discharge their liabilities in the normal course of business” if they’re unable to refinance their debt pile. It has not yet agreed new loans to replace debt due for repayment in June 2025.

The company paid out over £300m as part of its total financing arrangements last year. This included £235m on interest payments for its loan notes. It also borrowed £638m against around 1,000 freehold properties at the end of last year.

Its adjusted revenue was up from £1.61bn in 2022 to £1.72bn in its latest fiscal year. However, adjusted EBITDA fell to £375m from £400m and operating profit fell slightly to 219m from the previous £242m.

Despite a £100m increase in revenues, Stonegate’s losses almost doubled, rising from £130m to £257m. Meanwhile, operating profits were wiped out by costs after a £178m negative revaluation of its brands and £300m in finance costs.

According to data compiled by Bloomberg, the company also has over £100m in amortisation payments under its Unique Pub Finance Co securitisation structure due between now and September 2025. Much of its total debt pile is due to its acquisition of leased & tenanted pub business Ei Group in 2019.

Stonegate, which is domiciled in the Cayman Islands, is owned by TDR Capital, the private equity firm that also owns Asda. It’s been working on a refinancing package since February.

The notes to the company’s consolidated financial statements, 2023, state “There is a risk that should the £2.2bn debt not be refinanced, the group would not have the ability to repay it when it falls due. Plans are being formulated to refinance the debt, but these haven’t been executed at the date of approval of these financial statements.”

The statement adds: “Since the refinancing plans haven’t been executed, there is an indication that a material uncertainty exists that may cast significant doubt on the company and group’s ability to continue as a going concern for the going concern assessment period, and therefore that the Company and Group may be unable to realise its assets and discharge its liabilities in the normal course of business.”

John Hatton is a Managing Director in the Corporate Ratings team at Fitch Ratings, and he follows Stonegate. He told MCA that the company’s current position is a typical leveraged finance structure with high levels of debt relative to profits, in this case a lease-adjusted debt/EBITDAR of around eight times, a figure typical of its private equity ownership. The Ei acquisition meant that operational plans changed immediately, profit-enhancing pub conversions were delayed, and liquidity was constrained.

“For Stonegate, the debt situation is made worse primarily due to higher interest rates, the overall cost of debt for the group’s complex tiered debt structure and different parties not being able to agree a way forward in refinancing the debt,” he said.

For its part, Stonegate, point to a sector-leading Christmas trading period, and its delivery of a rise in revenue and a significant increase in profitability.

“We have been very clear that we continue to work towards achieving our long-term balance sheet goals, with the successful refinancing of a portion of our estate in December marking a significant strategic step towards this,” a spokesman said. “We would also like to assure our employees and partners that no venues are at risk as a result of this process.”

“TDR Capital has been and continues to be a supportive investor in Stonegate - developing the business over the last fourteen years into the UK’s largest pub company with 4,500 great venues across the country.”

A growing number of companies have raised investment funding through the private debt markets rather than look for equity financing with a stock market flotation. Increased regulation and the threat of shareholder activists are among the reasons why the latter option has become less appealing.

Private equity in particular has enjoyed something of a golden era over the last few years with tens of billions in “dry powder,” as its investment money is known, looking for a home. There have been concerns that during a previous era of historically low interest rates and with an increased amount of cash chasing roughly the same number of potential deals that the market is overheating, leading to unrealistically high valuations.

Whatever the sector, in many cases, private equity deals can see a business rack up considerable debt. There are now growing concerns about the levels of corporate debt generally. According to Wolfe Research, around $903bn in US corporate debt, excluding financial companies such as banks and investment groups, will come due this year, up a remarkable 343% from the $204bn due in 2023. Here in the UK in March the Bank of England expressed concerns recently about a possible ending of the private equity boom.

John Hatton’s colleague, Radim Radkovsky, a Director in the Global Infrastructure group at Fitch told MCA: “Fitch views pubs with a managed operating model as more adaptive and transparent than leased/tenanted pubs, due to their full control over operations. Managed pubs are generally owned by pub companies, pubcos, which employ all staff, bear all operating expenses of the pub, and usually design the offerings.”

He added: “In some cases, pubcos are converting tenanted estates to a franchise model, which is more adaptable to consumer demand, incentivizes sales growth, and benefits from the pubco’s retailing expertise.”

Will Sherwin, Co-Founder of Best of British Beer questions the wisdom of Stonegate’s decision to add the Enterprise Inns estate to its portfolio, but he told MCA: “There’s a huge variety of businesses under the Stonegate umbrella and a number of the themed operations have maybe seen their busiest years. The provincial sports bar units, wet-led community pubs and the late-night sector even in big cities are less appealing than they were. People’s socialising habits have changed dramatically and are now more home-based or experience-led.”

Traditionally, analysts have usually been less worried about the size of a company’s debt in absolute terms and more concerned instead about the debt in relation to the borrower’s turnover and profit. The important thing is that the markets believe that a company’s debt is manageable given its size and profitability.

They might regard debt as a positive if it’s being used sensibly to develop the business. A company with no debt, on the other hand, might have slim profits and little potential for development. The question is whether Stonegate can develop not just a refinancing plan for its debt but a distinctive and realistic business strategy and vision for its future during these difficult times for the pub sector.

  • Simon Brooke is a freelance journalist who has been published in the Financial Times, The Sunday Times, The Times, the Daily Telegraph and the Daily Mail on subjects including business, travel, property and retail.