Rating Actions Taken On Four U.K.-Based Pub And Casual Dining Restaurant Operators Following COVID-19 Lockdown

  • The pubs and casual dining sector in the U.K. is bracing for the impact of the COVID-19 pandemic, and the government's instructions to U.K. citizens to minimize social interaction in order to contain the spread of the coronavirus.
  • While the extent and duration of COVID-19's effect on the companies' financial position are uncertain, we believe earnings loss and the resulting decline in cash flow will be meaningful and could deplete the issuers' liquidity; or for those with higher leverage, even render the current capital structure unsustainable.
  • The U.K. government has announced a number of measures aimed at mitigating the impact of COVID-19 on businesses in the hardest hit sectors. At this stage, the process, timing, and extent of this support are uncertain and may not fully offset the effect of the adverse conditions on the issuers' credit metrics.
  • We are therefore lowering our ratings on Stonegate Pub Co. Ltd., Mabel Topco Ltd., and PizzaExpress Financing 1 PLC by one notch, and equalizing our rating on Ei Group to that of Stonegate following the completion of the acquisition. We are also placing our rating on Mabel Topco Ltd. and its senior notes on CreditWatch with negative implications.
  • We expect to resolve the CreditWatch placement and negative outlooks once we can assess the impact of the outbreak on each company's credit metrics and liquidity with more certainty.
LONDON (S&P Global Ratings) March 26, 2020--S&P Global Ratings said today that it has taken the following rating actions on four U.K.-based pub and casual dining restaurant operators.
  • We downgraded our long-term issuer credit rating on Mabel Topco Ltd. by one notch to 'B-', and placed the ratings on CreditWatch with negative implications.
  • We downgraded our long-term issuer credit rating on Stonegate Pub Co. Ltd. by one notch to 'CCC+', and assigned a negative outlook.
  • We equalized the issuer credit rating on Ei Group PLC to that of Stonegate following the completion of Stonegate's acquisition of Ei Group on March 3, 2020, placing it at 'CCC+' with a negative outlook. We plan to withdraw our ratings on Ei Group shortly after this rating action.
  • We downgraded our long-term issuer credit rating on PizzaExpress Financing 1 PLC to 'CC' from 'CCC-', and placed the ratings on CreditWatch with negative implications, following the announcement of a distressed debt issuance.

Rating Actions Rationale

The COVID-19 pandemic will severely harm pubs' and restaurants' results for 2020, and could result in rapid deterioration of their credit metrics and liquidity positions.  U.K. Prime Minister Boris Johnson recently introduced new measures to ensure British residents avoid unnecessary social interaction, in light of the rapid growth of confirmed COVID-19 cases across the country.
S&P Global Ratings acknowledges a high degree of uncertainty about the rate of spread and peak of the coronavirus outbreak. Some government authorities estimate the pandemic will peak about midyear, and we are using this assumption in assessing the economic and credit implications. We believe the measures adopted to contain COVID-19 have pushed the global economy into recession (see our macroeconomic and credit updates here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.
Rapid escalation of the COVID-19 pandemic, the recent mandatory social distancing announced by the government, and the closure of all dine-in businesses across the U.K. will lead to subdued earnings and cash flow generation for industry participants. These developments will significantly harm the fragmented U.K. casual dining industry in 2020, and possibly beyond. Although demand could pick up relatively quickly once the outbreak is contained, there is significant uncertainty around pubs' and restaurants' ability to withstand the liquidity stress posed by a stalled topline over an extended period of time.
On March 20, 2020, the U.K. government announced the latest raft of measures aimed at mitigating the impact of COVID-19 on U.K. businesses in the hardest hit sectors. The measures include the government's intention to pay up to 80% of the salary of workers in the most affected sectors (which includes pubs and restaurants) for at least three months, which in our view will be key to alleviating some of the short-term liquidity pressure on these businesses. While the timing and mechanism of such support is yet to be confirmed, the announcement indicated it could become effective within a few weeks.
The U.K. government has offered a 12-month holiday in business rates and a three-month deferral on value-added tax (VAT) payments, but the cost structure and cash charges typical for the pub and restaurant operators remain highly fixed. Rent, staff, and interest costs will weigh heavily on the issuers' liquidity during this time of sharp revenue decline. We therefore expect the companies to roll out various cost-cutting and cash-preservation measures, such as temporary staff reductions, deferral of rent payments, and capital expenditure (capex) cuts.
The potential timing of a recovery is highly uncertain, but we currently assume that the first quarter of the year will be affected only by a much-weaker March, with the second quarter being the toughest for operators (with heavy operating losses). We assume that the third quarter will see a slow recovery in footfall (over the crucial summer period), and that the fourth quarter of the year will approach normal market conditions. However, this recovery could be delayed, weighing further on credit metrics. We anticipate negative free operating cash flow, even after the likely deferrals in rent payments and capex.

An additional aggravating factor is the temporary stress on credit ratios, which could test the companies' ability to comply with their maintenance covenants. As a result, we expect pub and restaurant operators' immediate focus to be on protecting their liquidity positions in the short term, which might include seeking covenant relief or additional liquidity facilities from lenders.

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