Enterprise Inns Share Discussion Threads

[scburbs] 13/9/2011 12:20

As I said yesterday your conclusion is that they need to keep selling pubs to be able to pay down the principal of their debt as it amortises.

You could rewrite this as, if they don't sell more properties then they may struggle to meet both interest and scheduled debt repayments out of operational cashflow.

However, I doubt they are planning on meeting scheduled debt repayments solely out of operational cashflow. They are likely to be net sellers (disposal proceeds less improvements) for at least a couple more years IMV.

[the_doctor] 13/9/2011 12:04

I'm thinking about cash flows only

interest paid with cash
loan repayments paid with cash

hence 'Op cash flows of £162m in H1 2011'


'before any decisions are made about what to do with any free cash'
that was my point - some of the bond repayment appears to be mandatory aside from a holiday in 2012???

[jeffian] 13/9/2011 12:01

Because interest is revenue and loan repayments are capital. There "isn't a lot of room" in your example because you've taken a capital repayment off the revenue but chosen to ignore the capital receipts (£138m) they had from disposals in the period. The point is, there are many ways to skin the cat re the loans; they can pay them down out of cashflow, if available, or from assets disposals or they can refinance them. Whichever they choose to do has no effect on their ability to pay interest, which is deducted before any decisions are made about what to do with any free cash.

[the_doctor] 13/9/2011 11:44

I dont think I am jeffian - some of the principal repayments are mandatory are they not - hence a 'holiday' in 2012 being permitted

yes, I allow for improvements being optional


where have I gone wrong here then?
'Op cash flows of £162m in H1 2011'
'Interest payment was £97m'
'mandatory £37m of long-term loans paid off'

leaves £28m to play with as things stand


BUT, that IF revenue and op cash flows dropped, that £28m could largely go?
ie. not a lot of room

[jeffian] 13/9/2011 10:38

doc, #579

You're still mixing up revenue and capital. Have a look at page 10 on the interim report presentation (I tried to c&p it but the formatting goes awry)



ETI actually generated more free cash in H111 (£66m) than they did in H110 (£64m) despite falling revenue and operating profit, principally because of reductions in interest and tax payments. They went on to generate £148m in FY2010. Below that line, investment in the estate is 'discretionary spending' (i.e. they can choose when and how much) and loan repayments are a mixture of the contractual and any overall debt-reduction they may wish/are able to make. It is difficult to see the collapse in revenues that would put interest payments (an 'above-the-line' deduction) under pressure. They have explained openly how they are dealing with the contractual Corporate Bond maturities and within the Unique estate Securitised Bonds (for which they provide a Quarterly report to shareholders), as at the end of June 2011 they had made a further £20m repayment from the Disposal Account (i.e. pub sales) which took them £80.2m ahead of scheduled repayments with £103.6m held in cash after distributions to shareholders.

Whatever else happens going forward, not being able to pay the interest bill is the least of their concerns IMHO.

[scburbs] 13/9/2011 09:08

Responding to cheeky (below market) Piedmont offer to MAB.

"As detailed in the announcement by Piedmont today, the Possible Offer consists of a possible offer of 230 pence per share, a 2.4% discount to the Company's share price at the close of market trading on the London Stock Exchange on 12 September 2011¹."

[the_doctor] 12/9/2011 10:57

jeffian, my concern is that they'll not have as much as £70m to play with

assuming trading stays the same as H1 2011
Op cash flows of £162m

Interest payment was £97m
Plus, there was a mandatory £37m of long-term loans paid off
= £28m

they also spent £30m on improvements
... which means that if they hadnt sold properties, they'd have been £2m short

2012 is ok, since there's a principal repayment holiday
but this resumes in 2013.

so, in 2013, assuming a drop in improvements down to say £20m
That would leave them just £10m to play with
If sales deteriorate further, that would drop, or go completely (albeit offset against a drop in interest payments if the bank debt is paid off further in 2012).

ie. long-term, they can only just cover interest payments as things are, and will be stuck if trading deteriorates!?

[jeffian] 12/9/2011 10:55

doc,

"I guess that's why it's all about stabilising earnings"

Yes it is. At the analysts' conference on 16/11/10, Ted Tuppen made the comment "'Flat' is the new 'up'"!

[scburbs] 12/9/2011 10:51

In that case I don't agree with your conclusion! They certainly shouldn't be spending net capex, any improvements should be funded out of disposals.

The interest is reasonably covered (but not comfortably covered hence the need to sell properties). You are including an element of loan principal repayment in your comparison.

12m to 31 September 2010 had £367m of operating cash flow and £220m of interest (60%)
6m to 31 March 2011 had £162m of operating cash flow and £97m of interest (60%)

The proportion of operating cashflow taken up in interest (excluding loan principal repayments) has not moved. In 2009 it was actually slightly higher at 62% (235/381).

[jeffian] 12/9/2011 10:48

scburbs,

I didn't see that as I was typing when you posted, but that is very fair comment. Actually, I feel that ETI is a bit of a microcosm of the wider UK economy and that what the Govt are doing to try to get UK off the hook will also probably be the long-term solution to ETI's problems.

Inflation!

[robizm] 12/9/2011 10:46

just re-read the ims as i bought a load at 34p as part of my high risk element in my sipp. i like the asset backing as plenty of old pubs by me have been converted into flats etc and the ones in the south will hold their value or be worth even more as flats.

trading wise with people cutting back on sky tv, they will watch the football in the pub instead which will be good for trade and hopefully they will be pushing the food element as we are getting fatter and lazier as a nation.

[the_doctor] 12/9/2011 10:43

'Your conclusion is that they need to keep selling pubs to be able to pay down the principal of their debt.'

no, it was actually that if operating cash flows deteriorated by say 15%, then in 2013 they'd be struggling to cover interest and not able to pary for any pub improvements

the upside though is that IF op cash flows stay flat, then ETI will be generating about £90m cash per year (before pub improvements)
which would actually be very good.
I guess that's why it's all about stabilising earnings

edit: posted before seeing your post jeffian, I'll take a read...

[jeffian] 12/9/2011 10:43

I don't know about "wrong", doc. It's just a question of whether you expect all repayments of Principal to be made out of cashflow. On the basis of H111 figures, and assuming they need to go on spending £50/60m per year to maintain the estate, that leaves around £70m/year to play with. We know they are committed to paying down Tranche B because of the divi restriction, but Tuppen has said that he thinks they can support continuing bank debt of £400/450m, banking crises permitting, and if the banks can't/won't play ball, he has the option of going to the corporate bond market to replace the remaining bank debt altogether. He has also said that they intend to replace the 2018 corporate bond when it matures. As you have rightly pointed out in the past, most debt reduction has been achieved by property sales, but that is a bit of a vicious circle as it also reduces income. I think their answer to your concerns would be that they have several options besides just paying down debt out of cashflow.

On a wider issue, not specific to ETI, several of my City mates are predicting another October crash (if not before) on the basis of the 'perfect storm' brewing around the €, $, stagnant Western economies and slowing emerging markets, in which case consideration of the fundamentals of any stock is fruitless - they're all going down!

8-(

[scburbs] 12/9/2011 10:39

the_doctor,

Your conclusion is that they need to keep selling pubs to be able to pay down the principal of their debt as it amortises. As an overleveraged pub company there is not too much to say about that and I certainly can't see anyone disagreeing with that conclusion!

In broad terms they need to head for a stabilised state whereas the operating cashflow surplus (operating cashflow less interest - £147m in y/e 30/9/10) is stable and split between loan amortisation and distributions to shareholders. The remaining loan amortisation is picked up by an excess of disposal proceeds over improvements (£215m in y/e 30/9/10). This will enable them to degear gradually whilst offering some form of return to shareholders (unlike Punch who will be degearing for years before anything goes to shareholders - if it ever does).

If they don't keep selling then shareholders won't be seeing any returns as the debt is too high for the current climate (needs to get in the 50-60% LTV range, ideally the lower end of that range rather than the current c.65%).

[the_doctor] 12/9/2011 09:49

any thoughts on 556?

have I got something wrong??

[the_doctor] 09/9/2011 11:00

not paying down debt means that interest costs wont fall

I guess the off-shoot is that if they instead direct more cash to increasing earnings, then the interest 'fear' falls that way.

I'm concerned now - I thought the interest+mandatory debt repayment cover was much better for some reason!

[jeffian] 09/9/2011 11:00

Sorry, tiltonboy, that was sloppy of me! I didn't bother with the maths, I was looking at the Fixed Income Investor site and just picked up the "Yield" which is, as you say, the Gross Redemption Yield. I'm standing in the corner with my 'D' hat on now.

8-)

schurbs, there is no "debt buyback restriction" imposed by the banks, it is self-imposed by the company because, firstly, there is a dividend restriction on Tranche B and, secondly, they want to diminish their reliance on the banks, whose own problems get passed on to ETI with the market constantly worrying whether the facilities will be renewed every few years.

[tiltonboy] 09/9/2011 10:50

jeffian,

I take it maths isn't your best subject!!!

The running yield is around 8.7%, with a GRY of around 12%.

[jeffian] 09/9/2011 10:48

Tuppen is on record as saying that he doesn't want to pay down any more bank debt. In his view, an ongoing facility of £400/£450m is sustainable, which is where they plan to be in the current (2010/11) financial year. In the last resort, if the banks won't (or can't - they have their own liquidity problems! -) offer that, he has stated that they can replace it entirely through issuing more corporate bonds (as Punch did) but, of course, there is an interest penalty (the bonds currently cost around 3% more than the bank debt).

[the_doctor] 09/9/2011 10:44

scburbs - in my 556, it doesnt look like there'll be enough operating cash flow to cover interest payments, let alone pay off any further debt!

[scburbs] 09/9/2011 10:42

Jeffian, Is the debt buyback restriction whilst tranche B is in play or do they need to take out all the bank debt first? Do you have further details on the conditions attached to the bank debt?

[scburbs] 09/9/2011 10:40

the_doctor,

They certainly won't be planning on paying down £419m of the 31 December 2013 tranche A bank debt through operating cashflow alone.

[the_doctor] 09/9/2011 10:37

thanks jeffian, yeah, I realise that now

re the bonds, I do find it very hard to see why the market would be so concerned. Even worst case, there's little chance of a big loss IMO
I'd think ETI's debt is better secured than many other company's assets?

any thoughts on 556?

[jeffian] 09/9/2011 10:34

Thanks to tiltonboy for the heads-up on the corporate bonds. I hadn't spotted that. As someone said, it's either a worrying signal or a great opportunity!



At this price it offers a running yield of 12% plus 35% appreciation to maturity in 2018. It's hard to see why it has taken such a hit, given that it is well secured on a ring-fenced package of pubs, but a little scout round the Bond market shows it is not alone and many other Corporate Bonds took a similar dive in early August.

Re: comments above, as I've reported before, it is upsetting to Tuppen that he can't buy back his discounted debt at these prices because all available cash has to be applied to the bank debt (if only he'd spent his £1bn on reducing debt rather than buying back shares!) and, in a double-whammy, that is by far the cheapest and therefore saves the company least in interest. Unfortunately, that situation is likely to continue even after Tranche B is repaid because of the repayment profile on the remaining bank debt.

doc (#553) your reference is to the securitised bonds which are within the Unique estate and amortise over the term of the loan. The Corporate Bonds are a separate facility for £1.185bn maturing in 2018. The covenant is "Required to be supported by £1.9bn of assets and £135m annual income"

[the_doctor] 09/9/2011 10:33

'Key is whether they can roll-over debt at a rate of interest that isn't prohibitive'

that's a 2018 issue

My main concern is that well before then, ie. in 2013, they could be struggling to pay the interest/debt.

Required payments of £130m per 6 months, with cash flow from operations of £162m.
With £30m spent on pub improvements, they literally wont be able to tolerate ANY further drop in income!
No chance of any dividends jeffian, unless they continue the asset sales...

I suppose that one saving grace is that they could in theory just sell a few pubs each year to cover the interest/debt payments if they had to.