A leading analyst has said that he expects Enterprise Inns to confirm it can prepay Unique’s fixed rate notes when it updates on its half year performance on 15 May, allowing it to continue to upstream a dividend and thus aiding its bank debt refinancing.
Jamie Rollo at Morgan Stanley said: “We expect EBITDA of £169m (-6%), PBT of £67m (-9%) and EPS of 10.0p (-7%). We think current trading will be fairly weak, as with other pub companies, but that the results will be dominated by the company’s confirmation that it is able to prepay Unique’s A4 fixed rate notes. We forecast the bank debt will have dropped to around £370m.”
Rollo reaffirmed that Enterprise’s future was very dependent on its ability to prepay Unique’s fixed rate, with company currently prepaying the A2N variable rate notes as permitted by the documentation, thus allowing the scheduled principal repayment to be omitted from the Debt Service Coverage Ratio calculation.
He said: “The DSCR is thus boosted from around 1.0x to around 1.6x, above the 1.5x level when Enterprise can upstream a £60-70m dividend. However, the A2Ns have been nearly fully repaid, and the fixed rate A3 and A4 notes start amortising from the end of 2013. There is no formal ability to prepay these bonds, and there is some legal interpretation on whether the company can do this.
“We think the company will be able to buy and cancel around £70m of A4 notes, leading to a permanent reduction in loans outstanding, thus continuing to boost Unique’s DSCR to over 1.5x. The continuation of the dividend will not only help reduce the company’s bank debt, but also aid the bank debt covenant (as the dividend is c. 25% of ETI EBITDA). It is possible that Enterprise will have bought and cancelled some bonds by the time of the results, as a signal to both the market and its banks of its confidence in this mechanism.”
Rollo warned that if the company is unable to prepay, not only will it lose the dividend, but it will need to inject c£40m of EBITDA into Unique to ensure it does not drop below the 1.1x default DSCR.
The group’s net bank loan outstanding was £446m as at September 2011, and Rollo expects this to have dropped to around £370m at March 2012, and to £300m by September 2012.
He said: “This means the £123m Tranche B facility will have been paid off some time this summer, in advance of the December deadline. We expect Enterprise to negotiate a forward start facility for the £332m Tranche B facility (expires December 2013) to commence in September 2013, when we forecast the bank loan will be down to around £200m.”
Enterprise had disposed of 63 pubs in the year by its February IMS, excluding sale and leasebacks, for a total consideration of £40m.
Rollo said: “Proceeds per pub of £635k were ahead of the 2011 figure of £227k, suggesting the disposal of larger or better performing pubs, perhaps as it is starting to face limits on disposal numbers in Unique. The company had completed 17 sales and leasebacks for proceeds of £24m at an average rental yield of 6.85%. We think H1 proceeds will total around £80m, and we expect £175m of disposals in the full year.”
