Mark Brumby at Langton Capital takes a look at the latest on Punch Taverns’ attempts to push through its proposals regarding its debt restructure and asks, amongst other questions, whose court is the ball in now?
A number of Punch Taverns’ bond-holders issued a joint statement saying that they will not agree to Punch Taverns’ latest restructuring proposals and details are set out below The ABI (seniors), Angelo Gordon (alternative investment fund), Oaktree Capital (niche investor) and Warwick Capital (distressed debt hedge fund) put out a joint statement
In it, the creditors say they ‘will vote against the proposals at any meeting of the Issuer Companies’
They say they ‘believe Punch should re-open negotiations’. They reassure that they ‘remain willing to work in good faith to agree a consensual restructuring’ and say they ‘continue to believe this to be in the best interests of all stakeholders’
The joint statement points out that the named creditors have blocking stakes in a number of tranches of debt in both the Punch A and the Punch B securitisations
How final is ‘final’?
Punch noted on 15 January that ‘the Restructuring proposals are final’ and it’s not clear what wiggle room (if any) that implies
Whilst it is to be hoped that it isn’t, it is not clear if any retreat from the word ‘final’ would be a resigning matter
Even if any retreat were not a resigning issue, the management must be fatigued and, having given it what they said was their best shot, they may be unwilling to continue
Will the 14 February vote go ahead?
With three weeks to go, it is not clear if the 14 February meetings and votes will go ahead
One school of thought suggests that: As the company said it was going to have a vote, it should have one. There will be little additional cost and,
There is a difference between the ABI and the three named hedge funds saying they will vote the proposals down and them actually doing so
The other suggests: There is no point having a vote when four bodies, for somewhat different reasons, have said they will vote against
It would waste three weeks during which negotiations could not take place – as to open negotiations would imply a willingness to concede
And, despite the fact that its back is not yet against the wall, Punch does not have a great deal of time to waste
Whose court is the ball in?
Whilst it looks prima facie as though the next move is down to Punch Taverns, if it goes ahead with the vote, then it has effectively lobbed it back
The possible outcomes: Punch Taverns may say nothing in which case the votes will go ahead and the proposals, on the balance of probabilities, may be voted down
The vote may go ahead and the proposals be accepted. Though possible, this is a relatively unlikely outcome
Punch may suggest that progress has been made, that ‘final’ is not quite the absolute that it implied, and it may reopen negotiations
Given sufficient efforts on all sides to save face, this could happen
The directors may resign and / or call in administrators
Given the level of exhaustion, this may happen.
Arguably, it would be a shame as there is something still to play for.
The value of equity, cash plus 50% of Matthew Clark less known liabilities, is somewhere between 10p and 12p. By definition, unknown liabilities, potential tax issues, etc., are not taken account of in this calculation
Further thoughts: We suggested on 15 January that ‘one ‘no’ vote could/would scupper the deal as it stands and, if a note-holder knows that another is going to vote (or has voted) ‘no’, then it is to their advantage to say that they were going to do so as well
Hence a negative outcome could become apparent soon and could snowball into a flurry of competitively negative noise when none of the individual bond-holders actually thought the deal was a particularly bad one in the first place’
This would appear to have come to pass
The deal, though stressful and problematic, would still work if equity surrendered a little more ground
On the deal as proposed, repayment schedules would be pushed out and the NAV per share would increase (to perhaps around 90p, ex-intangibles)
Punch could, for the first time in many years, be valued on an earnings basis and, with virtually unchanged EPS of around 5.5p possible, a relatively modest PER of 8x would suggest a short term target price of perhaps 45p
With the group’s core estate now back in growth and its non-core units declining ‘by less than 5%’, the geared nature of the company could see EPS rise at about 4x to 5x the rate of EBITDA increase with the latter rising at perhaps 2% per annum
Modest capital spending should enhance earnings further, 7p might be achievable in the short term and a more upbeat PER of 10x would imply 70p
The above could be subject to some give-back to bondholders but, directionally, it suggests the deal is worth pursuing
The Punch Taverns’ response:
Punch Taverns responded to the bondholder rejection reiterating that ‘the full terms of its final restructuring proposals’ were announced on 15 January and that the 14 February vote is still scheduled to go ahead
The group says it ‘continues to be available to discuss with creditors their views of the restructuring proposals’
It is not clear whether the terms ‘final’ and ‘available to discuss’ are consistent with each other or whether there may be some concessions (to the extent that these are possible once the documentation has been published) ahead of 14 February
The proposed deal, currently rejected, is the culmination of 14 months of work.
In addition to being exhausted, the directors will be disappointed but the PLC’s reaction is couched in conciliatory terms.
The word ‘final’ had to be used in order to get the various parties’ attention – but it has also boxed the PLC into something of a corner.
It is unclear whether ‘discussing (the proposals) with creditors’ implies whether or not any changes could be made
The bondholders say that they believe a consensual deal can be agreed and not to talk to them about this could be seen as a missed opportunity because, though extremely risky, Punch Taverns’ shares represent an option over two very large but out of the money securitisations.
As with all options, the value could fall to zero but the potential upside is significant.
Equity is tiny in comparison to the two largest numbers on the balance sheet (fixed assets and debt) and material movements in either of those figures could wither wipe shareholders out or see them make very material returns.
If the terms of the deal are adjusted, this will impact the value of Punch’s equity going forward but, depending on the scale of any potential concessions, survival should surely bring a reward.
As we said on 15 January, ‘value-destroying decisions are made on a depressingly frequent basis (but most parties) believe the restructuring game continues to be worth the candle.’
