Enterprise Inns Share Discussion Threads

[jeffian] 15/5/2012 16:33

Agree with your posts, scburbs, but I still feel they need to find a way to reinstate a divi at some point in the foreseeable future if they want to rebuild an investment case for holding the share, otherwise they are just a 'zombie fund' managing the assets for the bondholders. Are you including property sales in your comment above ("This will have commit a substantial proportion of cashflow to debt buybacks if they are to stay 1 year ahead.")? They have committed to continuing the disposal programme and the use of proceeds to pay down debt is a perfectly valid strategy as these are the very assets for which the debt was incurred! With eps stabilising at around 20p/share, I don't see why they couldn't pay out, say, 5p/share covered 4x and costing around £25m. With a NAV around 280p and a divi of 5p, there would be an investment case for the share even if growth prospects were limited.

[scburbs] 15/5/2012 15:40

The presentation is interesting. Much more detail on the performance of different elements of the estate (non-substantives are a significant drain on capital/profitability) and details of the DCSR covenant benefit from the debt buybacks. This will have commit a substantial proportion of cashflow to debt buybacks if they are to stay 1 year ahead. This would constrain dividend potential in the same way that the DSCR covenant breach would have, but if they are buying debt back at a discount then at least they are adding value to the business.

[scburbs] 15/5/2012 07:47

Solid results. Good to see debt buybacks finally underway, albeit pretty small scale so far. Tranche B now down to £45m, but focus likely to be on further debt buybacks (if available at a discount) rather than a return to paying dividends.

"In addition we have purchased and cancelled £29 million Unique A4 securitised bonds in the period at an average purchase price of 76p for each £1 of nominal value. Subsequent to 31 March 2012 we have purchased a further £10 million A4 and £2 million A3 bonds, taking the total purchased and cancelled to £41 million. This represents over half of the planned purchase and cancellation of approximately £74 million (nominal value) of Unique A class fixed rate securitised bonds that we expect to complete by September 2013 in order to stay one year ahead of the scheduled debt profile. Prepayment and cancellation of these fixed rate notes will minimise the risk of a potential cash trap in Unique and enable Unique to continue to pay excess cash as dividends to ETI."

[scburbs] 14/5/2012 20:24

Results due tomorrow. I have sold a few to take some profits given the strong run against a weak market.

[jeffian] 05/4/2012 15:25

scburbs,

That's right (re: disposals/amortisation). Disposals don't count towards DSCR ratio which was at 1.68x at end December 2011 vs. covenant of 1.1x.

We had a discussion here back in November about the amortisation schedule (see posts 625 onwards) and I drew attention to a slide from the results presentation (pages 19-23 apply)



When the full amortisation schedule kicks in from 2014, things certainly will be a bit tight within Unique, but they claim to have ways of dealing with it.

I'm getting a bit jaundiced about the dividend issue. Ted Tuppen has always been very bullish about what he wants to do (remember, he didn't want to cut it in the first place!) but what he has been allowed to do (by bankers/nomads/the market?) has been rather different! I have noticed that while the talk at the Interims was all about paying off 'Tranche B' early to allow dividends to resume, there has been no such talk recently and no statement that Tranche B has been paid off (although there can only be about £20m outstanding). Au contraire, the talk now is all about buying in the discounted Bonds. The Interim announcement is due on 15 May so we shall see what they have to say about it then.

[scburbs] 05/4/2012 09:01

Jeffian,

Thanks, so disposals don't accelerate the amortisation schedule, although presumably the cash can't be extracted? Do you know if disposals count for the DSCR ratio?

My underlying question is whether once the bank debt with a dividend block on it is repaid can they meet the securitisation amortisation and DSCR ratio from disposals. This would allow them to pay a decent chunk of the operating cashflow out as dividends as opposed to having to inject/keep operating cashflow in the securitisation to meet the DSCR.

[jeffian] 05/4/2012 08:30

scburbs,
Within the Unique securitisation, the proceeds of any sales are held in a 'Disposals' account and the proceeds used to buy back notes from time to time (£10m in the Quarter to December 2011 leaving £9m cash within the Disposals account). There are no "prepayment penalties" and as at the end of December they were £67m ahead of schedule on repayments.

I'm not 100% sure of the position in the Corporate Bonds but, from memory, I think they can deal with the assets as they like as long as they replace any sold properties with another of equivalent value as security.

[scburbs] 03/4/2012 08:49

Jeffian,

On another point, have you seen any disclosure on what the sale of properties within the securitisation does to the amortisation profile and any early prepayment penalties?

[scburbs] 03/4/2012 08:35

Jeffian, It's a pretty opaque disclosure, I did wonder whether they might be the same. The aggregate voting rights disclosure implies they are, but then there is the "each of" wording implying they are not.

Are there new rules requiring each controlling shareholder in a chain of companies to make a disclosure on the same holding?

[jeffian] 03/4/2012 08:15

Eh? I think you'll find it's the same holding.

[scburbs] 03/4/2012 07:35

Approaching 24% across these entities.

[the_doctor] 02/4/2012 08:55

jeffian, while I agree with where you're coming from, the trouble is that
a) ETI critically needs the cash flows from the assets and selling down impacts that
b) an issue of covering cash outflow requirements from 2013 on does still remain. A fundraiser could potentially help, but I only consider it a slight benefit, with a slight possibility of happening I should add.


'Inflation makes debt disappear in a puff of smoke'
I'd be interested in your views about that...
In the context of ETI, would inflation not only help 'reduce' the debt pile IF earnings also rose?
ie. if salaries don't rise with inflation and people aren't willing to pay higher prices, then a company's debt pile remains just as onerous
The only one benefit would be that higher inflation should raise demand for higher rates from corporate debt


To expand on that OT, one thing I've always wondered:
There's quite a difference between home grown inflation and that imported from higher demand overseas and exchange rate impacts
ie. if the UK govt was printing money and that all went into the pockets of joe public, with them DRIVING prices up, then that would be good for debt

Conversely though, if other govts are printing money, as well as other countries consuming more, then UK prices rise regardless of whether joe public can afford to spend more
In this type, spending is squashed instead, rather than increasing - particularly with salaries growing only minimally in general

ie. in broader context, I've wondered if the inflation we have now is negative for house price rises (or in other words, doesnt make mortgage debt seem less), compared to say at other times where there probably has been a more direct relationship between inflation and house prices/public debt burden

This is all of course also before higher inflation drives up interest rates.
In short, the way I see it, high inflation at present makes debt seem a higher burden, rather than in effect eroding it?
If income doesnt rise vs the debt, then the inflation will have the opposite effect from making the debt disappear??

I'm interested to hear any views about that. I acknowledge that I may have the balance of factors wrong

[jeffian] 30/3/2012 23:07

Hi doc,

Whilst there is such a disparity between the share price (50-something p) and the claimed NAV (around 280p), it would be madness IMHO to have any meaningful Rights Issue if it can be avoided. Selling 280p for 50p does not make sense! If, say, they wanted to raise £1bn, existing shareholders would be diluted by around 80%! I would prefer the long haul, myself. If the worst is behind us, it is too soon to forget the beneficial effects of gearing on earnings growth and people seem to have ignored the inflationary effects of QE which are yet to burst out at some time. Inflation makes debt disappear in a puff of smoke and if anyone thinks that's too cynical in the context of ETI, consider how UK Govt are planning to deal with the country's debt mountain and what QE is all about. If it's good enough for Her Majesty's Government, it's good enough for us!

[monty panesar] 30/3/2012 19:25

As I see it value of the estate is around 4.5bn and debt 3bn. The debt is about 2x covered by cash-flow. Business is severely hampered by debt but isn't going to kill it IMHO.

[the_doctor] 30/3/2012 19:18

Good comments jeffian

I do actually think that a rights issue here would be a good move, regardless of the negatives

It would give that much more wiggle room, although the market cap is such that the amount they'd be able to raise wouldn't make too much difference anyway perhaps!??

[jeffian] 30/3/2012 19:02

Robert Walker, who takes over from Hubert Reid as Chairman tomorrow, has been doing a bit of buying over the past few days - nearly £150k on 275,000 shares. I don't usually take much notice of Directors' share purchases but I suppose at least it indicates that he doesn't think it's a complete basket case! Robert Walker is also Chairman of Travis Perkins. On the one hand, that's an excellent company which has done me very well as an investment over many years; on the other he was very quick to have a Rights Issue there when he felt the Balance Sheet needed shoring up after the banking crash. Let's hope he doesn't do the same here (or at least not until the share price is more aligned with NAV). It's felt to be one of the 'achievements' of current management post-crash that they've avoided such dilution (unlike PUB, MARS and GNK who all tapped shareholders at a deep discount to market value) and I feel that Ted Tuppen will want to achieve a legacy of getting through this with existing shareholder equity intact. He and Hubert Reid seemed to be at one on this. I wonder if Robert Walker will be the same?

[scburbs] 23/3/2012 10:47

More directly relevant article.

"Mitchells & Butlers and Enterprise Inns edge up on planned curbs on supermarket cheap beer dealsPub groups benefit from proposals to set minimum price per unit of alcohol"

[scburbs] 23/3/2012 10:43

Good news for pubs as the minimum price hits discount retailing.

"The government is proposing a minimum price of 40p per unit of alcohol in England and Wales in an effort to stamp out binge drinking.

...

Under the proposal, a minimum price, such as the proposed 40p per unit, would act as a floor and retailers would not be allowed to offer alcohol below that level.

In effect, it would not alter the price of most drinks but could significantly alter the price of heavily-discounted ciders, super-strength lager and cheap spirits.

The impact on prices could include:

A £2.99 bottle of red wine, containing 9.4 units of alcohol, would be priced up to £3.76
Cheap, strong lager at 75p a can, with three units per can, would become at least £1.20
Bulk-bought strong cider, costing 87p a can and containing four units, would almost double to at least £1.60
Cheap supermarket whisky at £16.10, with 40 units of alcohol, would probably be unchanged in price

...

"What we need to do is to set a price that is actually going to ensure that we don't damage responsible drinkers. People who like a drink or two, who like going down their local pub, have nothing to fear from this policy.

"But what we do want to do is to affect the cheapest end of alcohol, those sorts of offers that enable people to really do this 'pre-loading' - so many people now just get drunk at home before they go out, and that's what causes the problems in our town centres."

[shrewd_n_sharp] 22/3/2012 12:45

As a holder of the 2018 6.5% secured bonds I don't think there are any large concerns. They are secured against 503 pubs with covenants applied so the general performance of the company is of secondary consideration. As long as the income and property values don't dip too much then all is well. These covenant metrics are reviewed each year and page 23 of the recent Dec 2011 report says that these are fine:

"There are two covenants that relate to the Corporate Bonds;
an asset value covenant and a net annual income covenant.
At the year end there is an annual valuation of the pub estate
and a review of the annual income for the pubs secured
under each of the Enterprise corporate bonds. The valuation
is completed by a firm of independent chartered surveyors.
The directors certify the net annual income as part of an
annual compliance exercise. In the event that pub values or
pub incomes have fallen there may be a requirement to add
more pubs to the security of the corporate bonds and any
addition of new pubs must be completed within 90 days of
the year end. The Board is satisfied that there is sufficient
headroom in both of these covenants."

Should the metrics be broken fall then more pubs and income would need to be used as security. This is covered in Section 9c of the prospectus (Additional Security - Specific Property). There seems to be plenty of that right now to choose from.

The only problem I see in extremis is if the covenants are broken and there is no further income or pubs to secure the bonds with. I would imagine we must be quite a few years away from that situation. The recovery rate is estimated to be around 90% but if this extreme situation were to be 4 or 5 years away then the running yield will have mitigated the lost 10% recovery rate and then some.

[jeffian] 15/3/2012 23:18

Read all the above, epicmush, (the question is covered in some detail) and then it's a case of paying your money (or not) and making your choice.

[epicmush] 15/3/2012 22:03

Can someone explain something to me. NAV per share way above share price. Historically and currently profitable. PE ratio of 2-3. How can this be? I understand that they have high debts but the current price suggests there is a very high probability that they will not be able to refinance and hence will go bust. Is this possibility as likely as the price suggests?

[fillipe] 28/2/2012 11:42

edit - wrong board

f

[scburbs] 20/2/2012 23:04

Nice to see Morgan Stanley adding. Small beer for them!

[active trader] 17/2/2012 22:47

has morgan stanly realy just bought 25 million shares, would explain the 19 million gone through today