Spirit Pub Company has announced the results of its debt re-profiling, achieving its desired target of securing participating levels of 70% for A1 bondholders and 50% for A3 bondholders, which should free up c£53m of cash for expansion.
The company, which was linked with a bid for Orchid at the weekend, determined that the Final Acceptance Amount for the Class A1 Debenture Bonds will be £101.3m and for the Class A3 Debenture Bonds will be £58.3m, equal to 70% and 50% of the aggregate outstanding principal amount of each respective class of Existing Debenture Bonds.
Douglas Jack at Numis said: “It will now convert to A6 and A7 bond notes, thereby removing cash trap risk. With no change in the overall interest rate for the two notes (after swaps amortisation), the refinancing should also free £53.2m of cash for expansion.”
Under the proposals: the A1 bonds that convert to A6 receive a coupon of LIBOR + 180bps, up from LIBOR + 55bps; the A3 bonds remain at 5.86% until December 2014; thereafter, the A3 bond’s coupon falls to LIBOR + 55bps and for those A3 bonds that convert to A7, the coupon rises to LIBOR + 395bps.
Jack said: “Interest costs have increased relative to what they would have been, but this is almost all due to less amortisation (rather than higher interest costs):
“86% of the A1’s interest cost is in its swap and 79% of the A3’s cost is in its swap after January 2015. Thus, the higher interest coupon from the refinancing is offset by the more-expensive swaps continuing to amortise at the original (faster) rate, whereas as the (cheaper) bonds amortise at a slower rate.
The 25% increase in interest costs in 2016E (£14.5m vs. £11.6m) is fully matched by the 31% increase in outstanding A1/A3/A6/A7 bond debt in 2016E (£226.7m vs. £173.6m).
“The £53.2m reduction in bond amortisation over 2004-16E should be used for expansion. To cover the £3m of incremental interest cost (already in our forecasts) in 2016E, acquisitions need to generate a 5% EBIT return. In comparison, management is targeting a 20% cash return on freehold expansion. Our forecasts assume that Spirit invests £40m of this £53.2m and achieves a 12% EBIT return.”
