- Several positive developments may reduce the likelihood of future nationwide lockdowns in England and put the U.K. government in a position to take further, non-regressive, steps toward easing restrictions over the coming months, including continuing the gradual reopening of pubs.
- Following our full review of Unique Pub Finance Co., we affirmed and removed from CreditWatch negative our ratings on the class A, M, and N notes.
- Unique Pub Finance is a corporate securitization of the U.K. operating business of the tenanted pub estate operator Unique Pub Properties, the borrower. It originally closed in June 1999 and was last tapped in February 2005.
LONDON (S&P Global Ratings) May 12, 2021--S&P Global Ratings today affirmed and removed from CreditWatch negative its 'BB+ (sf)', 'B (sf)', and B- (sf)' credit ratings on Unique Pub Finance Co. PLC (The)'s class A4, M, and N notes.
On April 17, 2020, we placed on CreditWatch negative our ratings in this transaction to reflect the potential effect that the U.K. government's measures to contain the spread of COVID-19 could have on both the U.K economy and the restaurant and public houses (pub) sectors (see "34 Tranches On Seven U.K. Corporate Securitizations Placed On CreditWatch Negative Due To COVID-19 Uncertainty"). On Dec. 18, 2020, we kept our ratings on the class A, M, and N notes on CreditWatch negative considering the continuing significant uncertainty surrounding the timing and robustness of the COVID-19 recovery and the issuer's available liquidity (see "The Unique Pub Finance Co. PLC Class A, M, And N U.K. Corporate Securitization Notes Kept On CreditWatch Negative").
Unique Pub Finance is a corporate securitization of the U.K. operating business of the leased and tenanted pub estate operator Unique Pub Properties Ltd. (UPP or the borrower). It originally closed in June 1999 and was last tapped in February 2005.
The transaction features three classes of notes (A4, M, and N), the proceeds of which have been on-lent by Unique Pub Finance to UPP via issuer-borrower loans. The operating cash flows generated by UPP are available to repay its borrowings from the issuer that, in turn, uses those proceeds to service the notes. Our ratings on the notes address the timely payment of interest and principal due on the class A notes, and the ultimate payment of interest and principal due on the class M and N notes.
S&P Global Ratings believes there remains high, albeit moderating, uncertainty about the evolution of the coronavirus pandemic and its economic effects. Vaccine production is ramping up and rollouts are gathering pace around the world. Widespread immunization, which will help pave the way for a return to more normal levels of social and economic activity, looks to be achievable by most developed economies by the end of the third quarter. However, some emerging markets may only be able to achieve widespread immunization by year-end or later. We use these assumptions about vaccine timing 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.
Business risk profile
We have applied our corporate securitization criteria as part of our rating analysis on the notes in this transaction. As part of our analysis, we assess whether the operating cash flows generated by the borrower are sufficient to make the payments required under the notes' loan agreements by using a debt service coverage ratio (DSCR) analysis under a base-case and a downside scenario. Our view of the borrowing group's potential to generate cash flows is informed by our base-case operating cash flow projection and our assessment of its business risk profile (BRP), which we derive using our corporate methodology (see "Corporate Methodology," published on Nov. 19, 2013).
Recent performance and events
For the financial year ending in September 2020 (FY2020), UPP reported annual FY2020 EBITDA of £84.2 million, about 33% below the reported FY2019 results. Over the same period the borrower disposed of 31 pubs from the securitized portfolio, representing a decline in UPP's estate size of 1.6%. UPP ended FY2020 with a securitized estate of 1,870 pubs, the largest estate among our rated U.K. pub universe.
Following a third national lockdown in England, the U.K. government gave the go-ahead for pubs to reopen beginning on April 12, 2021, with a May 17, 2021, opening date for indoor service. Furthermore, with the summer approaching, indoor restrictions will have a muted effect on trading performance. More promising, the speed of the rollout of the vaccination program in the U.K. and the U.K. government's target that the adult population be offered at least the first dose of an available vaccine by the end of summer bode well for next autumn and winter.
We continue to assess the borrower's BRP as fair, supported by the group's sizeable scale of operations as part of the recently consolidated Stonegate Pub Company (the largest pub operator in the U.K.), its higher-than-average profitability, and the earnings stability that its tied-in leased and tenanted (L&T) model provides. We believe that, together with the cash-preservation measures put in place over the lockdown period, the above factors will support UPP's longer-term recovery in earnings toward more sustainable levels.
Issuer's liquidity position
Owing to the third national lockdown in England that spanned the second quarter of trading for the borrower, the issuer's liquidity position at the end of March 2021 had deteriorated.
The outstanding issuer/borrower loan balance after the March payment date is £659.4 million. To meet principal and interest payments for the quarter, the borrower drew £6.0 million on its cash reserve, which is available to cover the borrower's senior fees and payments on the loans.
The remaining cash reserve account balance after the March 2021 payment date is £42.99 million.
The committed liquidity facility remains fully undrawn with £152 million available to the issuer.
Unique Pub Finance's primary sources of funds for principal and interest payments on the outstanding notes are the loan interest and principal payments from the borrower, which are ultimately backed by future cash flows generated by the operating assets. Our ratings on the notes address the timely payment of interest and principal due on the class A4 notes, and the ultimate payment of interest and principal due on the class M and N notes.
In our view, the transaction's credit quality has declined due to health and safety fears related to COVID-19. We believe this will negatively affect the cash flows available to the issuer.
Our cash flow analysis serves to both assess whether cash flows will be sufficient to service debt through the transaction's life and to project minimum DSCRs in our base-case and downside scenarios.
In the face of the liquidity stress resulting from the COVID-19 pandemic on those sectors directly affected by the U.K. government's response, our current view is that the hardest-hit sectors will not recover to 2019 levels until 2023 or later. Importantly, it is our current view that the pandemic will not have a lasting effect on the industries and companies themselves, meaning that the long-term creditworthiness of the underlying companies will not fundamentally or materially deteriorate over the long term.
Our downside analysis provides unique insight into a transaction's ability to withstand the liquidity stress precipitated by the closure of pubs in the U.K. Given those circumstances, the outcome of our downside analysis alone determines the resilience-adjusted anchor (see paragraph 46 of our criteria). As a result, our analysis begins with the construction of a base-case projection from which we derive a downside case. However, we have not determined our anchor, which does not reflect the liquidity support at the issuer level--which we see as a mitigating factor to the liquidity stress we expect to result from the U.K. government's response to the COVID-19 pandemic. Rather, we developed the downside scenario from the base case to assess whether the COVID-19 liquidity stress would have a negative effect on the resilience-adjusted anchor for each class of notes.
That said, we performed the base-case analysis to assess whether, post-pandemic, the anchor would be adversely affected given the long-term prospects currently assumed under our base-case forecast (see "Modifiers analysis").
We typically do not give credit to growth after the first two years, however in this review, we consider the growth period to continue through FY2023 to accommodate both the duration of the COVID-19 stress and the subsequent recovery.
UPP's earnings depend largely on general economic activity and discretionary consumer demand. Considering the state of and prognoses for the COVID-19 pandemic, our current assumptions include (see "Economic Research: U.K. Recovery: Delayed But Stronger," published on March 9, 2021):
- Conditions for a rapid, consumer-led recovery remain in place, with strong fiscal and monetary policy support.
- The recovery will begin in second-quarter 2021 but from a much lower starting point because of the contraction in the first quarter, with the U.K.'s third national lockdown limiting GDP growth in 2021 to 4.3%.
- Our forecast is subject to significant uncertainty on both sides because of the unique and novel shock that the pandemic and lockdowns present.
- Conditions for a strong recovery remain in place. The U.K.'s swift progress with its vaccination program (now in a race against the spread of viral variants) is very good news in this regard, complemented by continuing fiscal and monetary support for households and businesses. The recovery is not forgone, only postponed. We expect a strong rebound to set in from the second quarter, which will spill over into 2022 with growth of 6.8% (5.0% earlier), before slowing to 2.2% in 2023 as momentum from the recovery fades.
- Businesses are now better prepared for, and have adapted to, operating under lockdowns. The data confirm that the effect of subsequent lockdowns on economic activity decreases over time.
Considering the potential effect from the third national lockdown and the subsequent recovery prospects, we have revised our forecast for 2021.
Downside DSCR analysis
Our downside DSCR analysis tests whether the issuer-level structural enhancements improve the transaction's resilience under a moderate stress scenario. UPP falls within the pubs, restaurants, and retail industry. Considering U.K. pubs' historical performance during the financial crisis of 2007-2008, in our view, a 25% decline in EBITDA from our base case is appropriate for the tenanted pub subsector.
Our current expectations are that the COVID-19 liquidity stress will result in a reduction in EBITDA that is far greater than the 25% decline we would normally assume under our downside stress. Hence, our downside scenario comprises both our short- to medium-term EBITDA projections during the liquidity stress period and our long-term forecast, but with the level of ultimate recovery limited to 25% lower than what we would assume for a base-case forecast over the long-term. For example, our downside scenario forecast of EBITDA reflects our base-case assumptions for recovery into FY2021 until the level of EBITDA is within 75% of our projected long-term EBITDA.
Our downside DSCR analysis resulted in a strong resilience score for the class A notes, and weak resilience scores for the class M and N notes, which are unchanged from our previous review. This reflects the headroom above a 1.8:1.0 DSCR threshold that is required under our criteria to achieve a strong resilience score after considering the level of liquidity support available to class A notes.
Both the class M and N notes have limits on the amount of the liquidity facility they may use to cover liquidity shortfalls. Moreover, any more-senior classes may draw on those same amounts, which makes the exercise of determining the amount of the liquidity support available to the class M and N notes dynamic. Our ratings on the class M and N notes address the ultimate payment of interest and principal due on the notes. Due to their deferrable feature, which means that these notes cannot default before their legal final maturity date (March 2032), these classes of notes will not experience interest shortfalls under our downside DSCR analysis within three to four years. Consequently, the resulting resilience scores are weak for both classes of notes.
Each class' resilience score corresponds to rating categories--excellent at 'AAA' through vulnerable at 'B' (see paragraph 46 of our criteria). Within each category, the recommended resilience-adjusted anchor reflect notching based on where the downside DSCR falls within a range (for the class A notes) or the length of time the notes will survive before we project shortfalls (for the class M and N notes). As a result, the resilience-adjusted anchors for each class of notes would not be adversely affected under our downside scenario.
Liquidity facility adjustment
Given that we have given full credit to the liquidity facility amount available to each class of notes, a further one-notch increase to any of the resilience-adjusted anchors is not warranted.
We applied a one-notch downward adjustment to the class N notes to reflect their subordination and weaker access to the security package compared to the class M notes. We have also applied a two-notch downward adjustment to the class A notes to reflect the weaknesses of the effectiveness of the two main covenant tests (financial covenant and restricted payment condition covenant), which is unchanged since our Nov. 22, 2019 review (see "Transaction Update: Unique Pub Finance Co. PLC").
As mentioned, we performed our base-case analysis to assess whether, post-COVID-19, the anchor would be adversely affected given the long-term prospects currently assumed in our base-case forecast. Based on our post-COVID-19 base-case analysis, which reflect the performance from FY2023 and beyond, we have concluded that the anchor would not be adversely affected.
Comparable rating analysis
A comparison of the potential ratings (following the modifiers analysis) for notes issued by The Unique Pub Finance and the ratings on the comparable class (by seniority) issued by Marston's Issuer PLC shows that the relative ratings for the class A notes are commensurate to the relative strengths and weaknesses between the borrowers in each transaction.
The BRP for both transactions is weaker than other pubco's with a fair BRP. On one hand, UPP's estate is larger, which enhances its economies of scale and provides better regional diversification than that of Marston's. On the other hand, Unique Pub Finance's L&T model and a wet-led orientation lead to weak earnings and cash flow generation per pub, and could expose the group to weaker trading performance in a market with declining on-trade beer consumption (see "U.K. Pubs, Shaken And Stirred, Look To Recover After A Cocktail Of Headwinds," published on April 8, 2021).
In our view, UPP's larger estate size outweighs the benefits from Marston's growing presence in the managed segment.
Based on those comparisons, we do not apply any additional adjustment due to our comparable rating analysis.
Due to weaker replacement provisions in the related agreements, we do not consider the liquidity facility and bank account providers to be in line with our current counterparty criteria (see "Counterparty Risk Framework: Methodology And Assumptions," published on March 8, 2019). As a result, the application of these criteria caps the ratings at the weakest issuer credit rating (ICR) among the bank account providers (National Westminster Bank PLC and Barclays Bank PLC), and the liquidity facility provider, NatWest Markets PLC.
This combination of factors results in a maximum supported rating on the notes at the level of the lowest applicable rating among the ICR on the account banks, and the ICR on the liquidity facility provider. The current minimum applicable rating is above the rating on the senior notes, so they do not currently constrain our ratings.
Over the next 12 to 24 months, we expect that the pub sector's earnings visibility will remain low as the sector grapples with several issues, with full-year revenue to recover to 2019 levels only by 2022. Factoring the significant cash burn during the closures and deferral of maintenance capital expenditures (capex), we expect pub operators to prioritize investment over deleveraging and that credit metrics will take time to recover to 2019 levels, with our current expectation being 2023. Our expectations of recovery in profitability and credit metrics in 2022 and 2023 will be the key factors in shaping our views of issuers' underlying credit quality and will be the main reason for any rating actions.
At the same time, we anticipate that food-led operators with takeaway models and pubs that appeal to families, will fare better than their drinks-led counterparts. For many rated pub operators, their significant freehold property portfolios have offered substantial operational and financial flexibility, but we have yet to see meaningful large-scale valuation support from conversions or alternative uses for pub properties. Rather, we expect that their quality of earnings to be a more defining factor in the credit profile compared to the quantum of real estate ownership. We expect L&T operators will continue supporting tenants in the recovery phase, leading to a potentially slower improvement in earnings compared with that of managed operators.
As we receive more issuer-specific and industry-level data, we will assess the transaction to determine whether rating actions are warranted.
We may consider lowering our rating on the class A notes if their minimum projected DSCRs in our downside scenario have a material-adverse effect on the class A notes' resilience-adjusted anchor.
We may also consider lowering our rating on the class A notes if the minimum forecast DSCRs falls below 1.4:1.0 in our base-case scenario.
We could also lower our ratings on the class M or N notes if there were a further deterioration in our assessment of the borrower's overall creditworthiness, which reflects its financial and operational strength over the short-to-medium term. This could be the result of increased leverage at UPP, driven by a failure to recover earnings and free cash flow following the impact of the pandemic, or a material increase in outstanding debt.
However, there have been a number of positive developments that, in our view, reduce the likelihood of future nationwide lockdowns in England and put the U.K. government in a position to take further, non-regressive, steps toward easing restrictions over the coming months. Beyond the reopening of pubs across the U.K. for outdoor service on April 12, 2021, and the expected start of indoor service on May 17, 2021, the speed of the rollout of the vaccination program in the U.K. and the U.K. government's target that the adult population be offered at least the first dose of an available vaccine by the end of summer bodes well for next autumn and winter. Finally, the quality of earnings will, in our view, be largely driven by the ability to invest and tailor their offering to changes to consumer behavior post-pandemic.
Due to the current economic situation, we do not anticipate raising our assessment of UPP's BRP over the near to medium term.
Environmental, social, and governance (ESG) factors relevant to the rating action:
- Health and safety
- Criteria | Structured Finance | General: Global Framework For Payment Structure And Cash Flow Analysis Of Structured Finance Securities, Dec. 22, 2020
- Criteria | Structured Finance | General: Counterparty Risk Framework: Methodology And Assumptions, March 8, 2019
- Criteria | Structured Finance | ABS: Global Methodology And Assumptions For Corporate Securitizations, June 22, 2017
- General Criteria: Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017
- Legal Criteria: Structured Finance: Asset Isolation And Special-Purpose Entity Methodology, March 29, 2017
- Criteria | Structured Finance | General: Global Framework For Assessing Operational Risk In Structured Finance Transactions, Oct. 9, 2014
- General Criteria: Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And 'CC' Ratings, Oct. 1, 2012
- General Criteria: Global Investment Criteria For Temporary Investments In Transaction Accounts, May 31, 2012
- General Criteria: Principles Of Credit Ratings, Feb. 16, 2011
- U.K. Pubs, Shaken And Stirred, Look To Recover After A Cocktail Of Headwinds, April 8, 2021
- Credit Conditions Europe Q2 2021: New Horizons, Old Risks, March 30, 2021
- Economic Research: U.K. Recovery: Delayed But Stronger, March 9, 2021
- COVID-19 Heat Map: Some Bright Spots In Recovery Amid Signs Of Stability, Feb. 17, 2021
- How The Geographic Footprints Of U.K. Pub Corporate Securitizations May Influence Their Performance, Feb. 8, 2021
- The Unique Pub Finance Co. PLC Class A, M, And N U.K. Corporate Securitization Notes Kept On CreditWatch Negative, Dec. 18, 2020
- Industry Top Trends 2021, Retail and Restaurants, Dec. 10, 2020
- Unique Pub Finance Co. PLC Class M And N U.K. Corporate Securitization Notes Ratings Lowered, July 7, 2020
- 34 Tranches On Seven U.K. Corporate Securitizations Placed On CreditWatch Negative Due To COVID-19 Uncertainty, April 17, 2020
- Transaction Update: Unique Pub Finance Co. PLC, Nov. 22, 2019
- Standard & Poor's Cash Flow Evaluator-Engine, June 21, 2019
- Global Structured Finance Scenario And Sensitivity Analysis 2016: The Effects Of The Top Five Macroeconomic Factors, Dec. 16, 2016
- European Structured Finance Scenario And Sensitivity Analysis 2016: The Effects Of The Top Five Macroeconomic Factors, Dec. 16, 2016
|Primary Credit Analyst:||Marta O'Gorman, London + 44 20 7176 2523;|
|Secondary Contact:||Alex Roig, CFA, London + 44 20 7176 8599;|
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