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Bulletin: U.K. Pub Corporate Securitizations Ratings Remain On CreditWatch With Continued Uncertainty As Winter Approaches

LONDON (S&P Global Ratings) Oct. 22, 2020--S&P Global Ratings said today that its ratings on 14 classes of notes from four U.K. pub corporate securitizations remain on CreditWatch, where they were placed with negative implications on April 17, 2020 (see list). The continued CreditWatch listing reflects the still significant uncertainty surrounding the timing and robustness of the COVID-19 recovery and each issuer's available liquidity.

On April 17, 2020, we placed our ratings on 27 classes of notes issued by U.K. pub corporate securitizations on CreditWatch with negative implications (see "34 Tranches On Seven U.K. Corporate Securitizations Placed On CreditWatch Negative Due To COVID-19 Uncertainty," April 17, 2020). These CreditWatch placements reflected the U.K. government's measures to contain the spread of COVID-19 and their potential effect on both the U.K. economy and relevant business sectors (see "European Corporate Securitizations: Assessing The Credit Effects Of COVID-19," March 26, 2020). Since that time, various rating actions were taken to resolve certain of the Watch placements (see "Update For April 2020 European Corporate Securitizations CreditWatch Placements," July 21, 2020), but ratings on 14 classes of notes remain on CreditWatch.

The U.K. government gave the go-ahead for pubs to reopen beginning on July 4, 2020. Based on latest available information, over 90% of each pub company's (pubco) estate has reopened, with improved like-for-like (LFL) turnover results over the summer trading months. However, it was a tale of two halves, with July showing LFL declines from the same period in 2019, and August showing LFL growth, largely attributable to the U.K. government's "Eat Out to Help Out" (EOTHO) scheme and temporary value-added tax (VAT) relief. Trading results for September, following the cessation of EOTHO, show LFL declines in turnover. On balance, the overall results since reopening exceeded our expectations.

Although the recovery has been better than expected, the pandemic has had a severe impact on both the pub and casual dining industry in the U.K. and the broader macroeconomic environment. The number of reported cases in the U.K. has dramatically increased recently, and the long-term trend does not look promising. A rise in COVID-19-related fatalities could result in the U.K. government imposing another national lockdown, just as regional outbreak surges have resulted in further localized lockdowns.

We now expect that some restrictions will remain in place until the middle of next year, when we assume that a vaccine or effective treatment will have been produced and widely distributed. In the meantime, we expect that new restrictions will continue to be introduced at the regional and local level, at least temporarily, as the U.K. government struggles to keep the emerging second wave of COVID-19 infections in check. As of Oct. 12, a local COVID-alert level, or tiering, system is in effect for England. Under the tiering system, each local area will be assigned a local COVID tier of "medium," "high," or "very high," based on the level of infection for that area. General restrictions on standing and drinking/socializing in groups of six or less ("the rule of six") apply across England; however, additional restrictions come into play for the "high" and "very high" local COVID tiers. That said, the actual restrictions for a particular area in the "very high" local COVID tier will be decided based on discussions between the local and national governments.

For pubs, an additional restriction on socializing between members of different households (at the "high" local COVID tier) and the closure of pubs (at the "very high" local COVID tier) would have the greatest impact, although closures would mainly affect wet-led pubs that lack any significant food offering, as those with sit-down food service would be allowed to remain open. Following the introduction of the tiering system, Liverpool was the first local area to be designated a "very high" alert level and was followed by neighboring Lancashire, with Greater Manchester and South Yorkshire to be added in the coming days. The areas being designated as "high" now include London and continue to proliferate.

Each pubco's earnings depend mostly on general economic activity and discretionary consumer demand. Given the nature of the COVID-19 pandemic, our base-case assumptions remain very uncertain. Considering the current trajectory of coronavirus transmissions and reported cases, along with the expectation regarding timing of any vaccine or effective treatment, we anticipate reduced consumer spending and confidence, muted inflation, and potential for further weakening in the pound sterling as headwinds for pubs and restaurants continue over the next 12-18 months. The ability to withstand any future loss of turnover will come down to the current level of headroom over financial covenants, the ability to manage costs to preserve cash flows, and readily available sources of liquidity. Wet-led pub estates with high exposure to the north of England (which currently has high infection rates that may trigger local lockdowns) are the most vulnerable.

Each issuer's liquidity position at the end of the summer trading is much stronger than we had previously expected. Although we acknowledge solid performance since reopening, the potential for a downturn during the fall and early winter months, in terms of the progression of the pandemic and the U.K. government's response, presents downside risks that could erase the gains from the summer-trading months.

Given the current uncertainties surrounding the path the COVID-19 pandemic will take in the U.K., the prospects of and timing for a vaccine against the virus, and the U.K. government's response, we do not have a strong enough basis for updating our assumptions at this point, but we will continue to observe what will happen over the next three months.

As we develop better clarity on the expected size and duration of reductions in the securitized transactions' net cash flows, we will evaluate whether adjustments to our base-case and downside projections are appropriate. Changes in our projections could adversely affect our debt service coverage estimates, which, in turn, could put pressure on our ratings. If longer-term effects emerge that reshape the economy or industry, we may revise our assessment of a company's business risk profile, which could also result in rating changes. We expect to resolve the CreditWatch placements within the next 90 days when we have a clearer guidance on the overall effect on each company's liquidity during the shutdown, our evolving view of the severity and duration of the COVID-19-driven stress, the prospects for recovery, and the long-term impact on the U.K. economy and pub industry.

S&P Global Ratings acknowledges a high degree of uncertainty about the evolution of the coronavirus pandemic. The current consensus among health experts is that COVID-19 will remain a threat until a vaccine or effective treatment becomes widely available, which could be around mid-2021. We are using this assumption in assessing the economic and credit implications associated with the pandemic (see our research here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.

Related Research

CreditWatch Placements
Issuer Class Rating

Marston's Issuer PLC

A2 BB+ (sf)/Watch Neg
Marston's Issuer PLC A3 BB+ (sf)/Watch Neg
Marston's Issuer PLC A4 BB+ (sf)/Watch Neg
Marston's Issuer PLC B B+ (sf)/Watch Neg

Greene King Finance PLC

B1 BB+ (sf)/Watch Neg
Greene King Finance PLC B2 BB+ (sf)/Watch Neg

Unique Pub Finance Co. PLC (The)

A4 BB+ (sf)/Watch Neg
Unique Pub Finance Co. PLC (The) M B (sf)/Watch Neg
Unique Pub Finance Co. PLC (The) N B- (sf)/Watch Neg

Mitchells & Butlers Finance PLC

B1 BB (sf)/Watch Neg
Mitchells & Butlers Finance PLC B2 BB (sf)/Watch Neg
Mitchells & Butlers Finance PLC C1 B+ (sf)/Watch Neg
Mitchells & Butlers Finance PLC C2 B+ (sf)/Watch Neg
Mitchells & Butlers Finance PLC D1 B+ (sf)/Watch Neg

This report does not constitute a rating action.

Primary Credit Analyst:Greg M Koniowka, London (44) 20-7176-1209;
greg.koniowka@spglobal.com
Secondary Contact:Alex Roig, CFA, London + 44 20 7176 8599;
Alex.Roig@spglobal.com

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