Moody's Expect Near-Term Pub Securitisations Performance to Decline

LONDON (Alliance News) - Moody's Investors Service said on Wednesday it expects the performance ...

Alliance News 13 September, 2017 | 5:28PM
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LONDON (Alliance News) - Moody's Investors Service said on Wednesday it expects the performance of rated pub whole business securitised transactions to decline over the next 12 to 18 months.

Early stages of a deterioration are already being seen in key credit metrics, argued the rating agency. Moody's singled out debt serviceability and leverage of rated transactions, limited upside to free cash flow growth, pressured profitability and rising inflation as all being considered early warnings signs.

"Pub operators' earnings are being curtailed by changes in consumer demand away from beer consumption as well as macroeconomic factors including a rising national living wage, inflation and sterling depreciation," said Assistant Vice President and analyst at Moody's, Thomas Rahman.

Demand on pub operators to invest heavily in capital expenditure in order to convert and rebrand pubs will limit the upside in free cash flow. "Pub operators are moving away from traditional wet-led-serving alcohol outlets to focus more on serving food," explained Moody's, which it said is requiring heightened capital investments.

Earnings before interest, tax, depreciation and amortisation have also been declining since 2016, Moody's explained.

Rising staffing costs due to the rise in the National Living Wage in April to GBP7.50 per hour from GBP7.20 has impacted profits, which will "further limit any upside potential" as the National Living Wage is set to rise to GBP9 in April 2020.

Inflation and weak sterling are also highlighted by Moody's as negatively influencing profit growth potential. "Rising inflation has increased operating costs among pub operators," said the agency.

"A significant portion of the goods sold at pubs are sourced from overseas and any further declines in sterling and/or subsequent rises in inflation will further erode Ebitda."

Moody's said the recently-enacted Market Rent Option may indeed result in more publicans moving from beer-tie arrangement to rent-only ones. However, although it recognises that "risk still exists" for pub operators, the MRO may "not negatively affect operators' Ebitda as severely as previously anticipated".

Moody's said it has noticed that debt serviceability and leverage of rated transactions have revealed early warnings signs. "Among our rated pub whole business transactions, debt

multiples have largely shown a downward trajectory," explained Rahman. "However, there are signals that the decline in Moody's debt multiples is slowing and may potentially start rising."

By Ahren Lester; ahrenlester@alliancenews.com.

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