Standard & Poor (S&P) has lowered its long-term corporate credit rating on Enterprise Inns (ETI), saying that in its view the company’s liquidity position is under pressure despite ongoing disposal-funded debt repayments.
It said that its negative outlook on Enterprise reflected continued pressures on UK consumers' discretionary spending, ongoing structural issues in the tenanted pub sector, and its view that the company will be reliant on further pub sales to meet debt amortization requirements and successfully refinance bank facilities in 2013.
S&P said the downgrades, which included the lower its rating on the group’s senior secured bonds, also reflected the tight headroom under Enterprise’s bank covenants, the threat of a future dividend lock-up at its Unique Pub Finance Co. PLC (Unique) securitization materially reducing the group’s solo earnings, as well as rising lease liabilities as a result of sale-and-leasebacks.
It said that in its view Enterprise’s “highly leveraged” financial risk profile is unlikely to improve in the next 12 months.
In a statement S&P said: “For the financial year to 30 September 2012, we anticipate a mid-single-digit fall in ETI's revenues, with adjusted Ebitda down by nearly 10%. Declines in revenues and Ebitda are primarily the result of the company's pub disposals. We anticipate that the trading performance of the substantive estate will stabilize in the period, but we see low-single-digit negative like-for-like sales across the whole estate.
“Our base-case assumptions take into account pressure on UK consumers' disposable incomes, low consumer confidence, and the possibility of a further deterioration in the UK macroeconomic environment. In our view, ETI's earnings are likely to remain under pressure due to adverse consumer spending trends in 2012, as well as to continuing disposals.
“Furthermore, the outlook reflects ETI's tight headroom under bank covenants, and our view that weaker credit metrics could persist for some time despite ongoing debt repayments from disposals. We view the sale-and-leasebacks as at best neutral for ETI's lease-adjusted credit metrics.
“Poorer trading conditions than we anticipate and any shortfalls in anticipated disposal proceeds could adversely affect the company's ability to finance debt amortizations, Unique dividend payments, and covenant compliance. Limited headroom under the Unique dividend lock-up threshold could have implications for ETI's future covenant compliance under its bank facilities.”
S&P said it could lower its ratings if liquidity were to weaken further or if solo Ebitda interest coverage were to drop to less than 2x.
It said that this could result from deterioration in operating performance, Unique entering dividend lock-up, or an inability to refinance bank facilities.
It concluded: “In our opinion, rating upside is currently minimal.”
