London - If
Heineken's proposed acquisition of about 1 900 Punch Taverns pubs goes
through, a group of debt funds can claim victory in one of the toughest
restructuring fights of recent years.
The UK-based
company's securitised bonds, whose value totals more than 1.3 billion pounds
($1.6 billion), are in focus because many British pubs are, financially
speaking, beer-selling devices engineered precisely to support a steady stream
of cash flows to noteholders. Punch's founders were among the first to realize
that the technique of whole business securitisations — that is, selling debt
backed by a single vehicle that takes into account the value of both a
firm's assets and its cash flows — could be applied to finance the
acquisition of the thousands of pubs being offloaded by brewers in the
1990s. In a 1989 ruling, regulators had taken aim at beermakers'
control over drinking establishments, and forced many to change
hands.
Read also: Beer wars: Heineken targets SAB
In 1998, Punch's
founders raised more than half a billion pounds of debt from investors in
asset-backed securities to support the purchase of 1 400 or so pubs from brewer
Bass plc, in a securitization deal known as "Punch A". It is the
Punch A portfolio that Amsterdam-based Heineken proposes to take over.
Punch later tacked on more groups of pub, backed by two further securitisations
(known as "Punch B" and "Spirit") and after the company was
publicly listed in 2002, its share price soared.
Crashing stock
The stock
crashed from mid-2007 as the value of indebted, securitization-funded companies
evaporated post crisis. The firm's earnings were also pummelled by an
indoor smoking ban which kicked in around the same time and helped to
keep drinkers away. Amid these constraints it took time for a debt
restructuring to come to fruition, with the company first spinning off its
Spirit group of pubs in 2011 before a formal process was initiated the
following year.
By this time
Punch Taverns was a big focus for distressed-debt investors, with major
industry players seeking to identify an investment strategy that would
generate profit from the company's complex capital structure. By 2013 a group
of funds including Glenview Capital, Avenue Capital and Luxor Capital had taken
control of most of the junior debt in one of the securitizations, and had
bought more than half of its shares.
Senior
bondholders formed a group to protect their interests, and repeatedly pushed
back on proposals made by the company in a protracted battle about who
would shoulder the losses, before parties came to an agreement in the latter
part of 2014. The final deal forced bondholders to accept a loss on 600 million
pounds of debt, with seven funds taking up the offer of newly issued
notes and shares — Glenview and Luxor foremost among them.
Read also: Heineken froths over beer deal
Now, little more
than two years later, Patron Capital and Heineken have teamed up on an offer
that values Punch Taverns at more than 400 million pounds. A vehicle set
up by Patron has agreed to buy the whole company then immediately sell the
Punch A portion to Heineken for 305 million pounds. Punch's shares soared 50
percent on the news.
Punch's top
shareholders, Glenview Capital, Avenue Capital and Warwick Capital, who now
together hold just over 50 percent of the company's equity, back the deal.
Senior bondholders have seen some appreciation in their assets, but only a
fraction of that of equity. Those funds that went into the equity and debt
through the restructuring, and for whom a successful exit will likely have been
a big goal in that deal, might be forgiven for being in pretty good cheer this
holiday season.