Moody’s, the credit ratings agency, has assigned a first-time rating to Stonegate Pub Company on the back of the group’s £400m bond offer.
It has assigned a B2 corporate family rating (CFR) and a B2-PD probability of default. Concurrently, Moody’s has assigned (P)B2 senior secured ratings and loss given default (LGD) assessment of LGD3 to the £240m senior secured fixed rate notes due 2019 and £160m senior secured fixed rate notes due 2019 to Stonegate Pub Company Financing plc, both currently being marketed.
It said that the outlook for all ratings is stable.
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 show moderately improving coverage and leverage trends over time.”
The company said that the assigned B2 corporate family rating reflected Stonegate’s relatively small size (623 units), limited operating history (established in 2010) and also takes into consideration uncertainty regarding its run-rate operating margins given the shift from acquisition-driven to more organic growth, as well as considerable leverage (6.8x on a pro-forma basis as calculated by Moody’s) and modest coverage (1.1x pro-forma as calculated by Moody’s), as well as limited retained cash flow.
Moody’s said: “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. The company is initially weakly positioned in the rating category given the early stage of integration of recently acquired assets and uncertainty associated with the scope of future synergies.
“Stonegate anticipates realizing significant synergies from its increased platform and has already seen improvements in its supply arrangements; however, the full extent of the benefits and their recurring potential is uncertain.”
Additionally, Stonegate expects to reduce its acquisition-related costs, which Moody’s also sees as diminishing.
It said: “Still, to the extent Stonegate chooses to pursue “bolt-on” acquisitions (similar to the Living Room and Bramwell transactions completed at the end of 2013), which remain part of its strategic arsenal, a certain amount of such expenses will remain.
“Stonegate’s leverage is elevated and coverage modest at 6.8x and 1.1x pro-forma for the transaction, respectively. In addition, its retained cash flow to debt ratio is expected to be only 2.2%. Moody’s expects these metrics to improve as a result of growth in the sector, successful completion of the integration efforts and 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 does not face any debt maturities until 2018 when the £25m revolving credit facility (RCF) comes due. However, Moody’s does not anticipate the company to generate more than nominal free cash flow and therefore expects Stonegate to manage cash outflows, including capex phasing carefully. The RCF has a minimum EBITDA covenant, with which Moody’s expects the company to remain in compliance.
“The (P)B2 ratings of both senior secured notes (together £400m) is in line with the B2 CFR, given that both notes rank pari passu amongst each other and also with the RCF, the only other piece of debt in the capital structure. All debt instruments are secured pari passu with respect to Stonegate’s freehold and certain leasehold assets, which provides additional support for bondholders.”
Moody’s B2 rating is the equivalent of Fitch’s and Standard & Poor’s B rating, and is described as: An obligor is more vulnerable than the obligors rated ‘BB’, but the obligor currently has the capacity to meet its financial commitments. Adverse business, financial, or economic conditions will likely impair the obligor’s capacity or willingness to meet its financial commitments.
