Fitch, the debt agency rating, has downgraded the fixed rate notes of Wellington Pub Company, the c.810-strong pub estate owned by the Reuben Brothers and managed by Criterion Asset Management.
The agency said the downgrades were mainly driven by changes to the financial metrics applied in its rating criteria, but that these changes were compounded by further declines in the pub group’s performance, its limited scope for operational change and structural weaknesses.
It said that its negative outlook reflected the view that Wellington's performance remained challenged by macro-economic factors such as the uncertainty about the jobs' market; the ongoing change in consumer behaviour especially affecting wet-led pubs (more than 80% of the portfolio); further exposure to alcohol taxation; the continued strength of the off-trade, which all coincided with a large number of leases coming up for renewal next year.
Fitch said that the lease renewal process remained an area of concern for as a significant portion of the portfolio is due for renewal over the next three years - almost 15% of all leases are set to expire by 2012.
It said that Wellington continued to experience a shortage of experienced and financially strong tenants looking to enter substantive agreements for residential pubs, and as a result, around 102 pubs are currently not on long leaseholds, of which 52 are vacant.
During the past four quarters, Fitch said that 38 properties had been repossessed, with more expected in the next few quarters, partly due to expiring leases but also rising rental arrears deemed non-recoverable.
The agency said that another area of concern was the state of repair of the portfolio. It said that all substantive agreements were on full repairing and insuring (FRI) leases, placing the obligation to maintain the properties on the tenant.
However, with tenants struggling to pay their rent it estimates that about 80% of the portfolio is suffering from some degree of deferred maintenance.
