Enterprise Inns Share Discussion Threads

[scburbs] 06/10/2011 12:02

ZhenlinYoung,

Just so I understand your analysis, it is wrong to sell now as the value may be higher in the future and then people would have regretted selling now?

Of course the dynamics of selling pubs at book to buy back bonds at a discount has a similar impact on net asset value as just holding those pubs and the value increasing by an amount equivalent to the discount.

You could just turn your argument on its head and say that the company will regret repaying its bonds at par in the future when it could have paid 30% less than par just a few years earlier!

[the_doctor] 06/10/2011 11:43

I'm waiting for 25p before buying more, but nearly went for it yesterday anyway

[the_doctor] 06/10/2011 10:51

'When the property market starts another round of booming'

that's a big if. It hasnt dropped yet because barely any austerity measures have come through... mortgage rates are so low meaning property is cheap on a current running cost basis... and the nation still seems to think property is a one way bet

[zhenlinyoung] 06/10/2011 10:45

scburbs,
I am new in ETI. But I totally disagree with you about further sale of pubs to pay down the bonds.

Every markets have ups and downs..In a depressed property market, ETI are doing the right thing. Just sell enough to fill the bank's mouth. Keep our properties with the company.

When the property market starts another round of booming, I am sure ETI will find a better price for its pubs..At that time, I do not want people screaming "how silly ETI was, they sold their pubs by 50% discount two years ago..."

Similar comments from CEO of MECOM two or three years ago about this. It is not correct to ask companies to sell the property when the market is depressed. Moreover, ETI have pretty enough to fill the bank's mouth. Give it another year, when the London Games comes and we have interest payments holiday in 2012, the whole picture for ETI will change totally.

[bobsidian] 06/10/2011 09:23

jeffian - 5 Oct'11 - 19:49 - 601 of 605

"Enterprise Inns is the only one which has avoided a dilutive Rights Issue."

You would be hard pressed to tell that from the share price action.

"Why would it want to do it now? As the_doctor points out, most of its debt is in the form of corporate bonds secured on groups of pubs. Why would the bondholders swap that security for 'equity' in ETI?"

The stockmarket and debt markets seem to be dictating the course of action to be taken by the management of ETI and by the bondholders as they ratchet up the pressure on both by removing financing flexibility.

[scburbs] 06/10/2011 08:29

Morning Jeffian,

You may think we have covered the point, but clearly we did not finish in agreement!

They have already been raising cash (via sale and leasebacks etc.) to cover the bank debt as well as the operating cashflow they are generating. What I am saying is they should expand the sale program to take out some discounted debt as well. It would be silly not too. Clearly they shouldn't use cashflow that needs to be reserved to deal with the bank debt so it would need to be extra disposals, but to be honest I support that anyway as the market clearly thinks the gearing is too high (i.e. I would support extra disposals at near to book to pay back more debt at par, so to buy back debt at a discount is a real no brainer). They need to make an effort to get their LTV ratio below 60% and ideally towards the bottom end of the 50-60% range.

[spob] 05/10/2011 22:57

coffee smells good

[jeffian] 05/10/2011 22:46

scburbs,

We've already covered this point! The problem for ETI is that the pressure is from (cheap) bank debt which they are forced to repay before they consider buying in discounted corporate bonds. Of course they would love to pay 70p in the £1 to cancel the bonds, but there is no pressure from bondholders and the uncertainty is from the banks who may be unwilling/unable to renew facilities as they come up every 3 years or so. ETI have said that they would like to settle at around £400/450m bank debt with the existing bonds amortising over the long term; if that can't happen, the emphasis will be put on paying off bank debt.

[scburbs] 05/10/2011 20:48

Sell pubs, buy back debt at a discount. No surer way to improve the equity value provided those pubs are saleable at close to book value. Time for bold action from management.

Forget any plans to restore the dividend and apply all available cashflow to taking advantage of distressed debt pricing.

[jeffian] 05/10/2011 19:49

bobsidian,

Which one of these is the odd one out?

Greene King
Marstons
Punch Taverns
Enterprise Inns

Answer: Enterprise Inns is the only one which has avoided a dilutive Rights Issue.

Why would it want to do it now? As the_doctor points out, most of its debt is in the form of corporate bonds secured on groups of pubs. Why would the bondholders swap that security for 'equity' in ETI?

It's not going to happen IMHO.

[the_doctor] 05/10/2011 19:09

'the problem remains of how to pay down the debt without eroding the core of its income and profit generation capability'

well, the debt doesnt need to be paid off
no reason why it cant largely sit there and be refinanced as required
- just as the assets that more than cover it can just sit there

the issue IMO is that ETI could later be on a pretty thin line between covering interest payments and not being able to

that'll be a fear until earnings are stabilised and returned to growth
in the current environment, that could be a real challenge

they've created a real mess by taking on such debt
one issue being that to pay short-term debt, they need to sell assets...
... which in turn reduces earnings
and earnings have now fallen to a level where people (IMO) really worry about the company's ongoing ability to cover interest payments etc

It is hard to see any reason for a turnaround other than the market eventually thinking the market cap is sufficiently low to warrant the risk...

a debt for equity swap would resolve that, but unfortunately I tend to think bond-holders would prevent it being done on terms acceptible to shareholders
I dont know about that though
It's somewhat in bond-holders' interests, since a more robust company with less debt has a brighter future and assets at least well cover liabilities

[bobsidian] 05/10/2011 17:31

After a debt for equity swap.

Until then the share price seems destined to continue to be crushed in anticipation of such an arrangement.

It was noticeable that PUB had done its best to draw a line under its own inexorable share price decline by splitting into PUB and SPRT but the stockmarket still seems unconvinced. Wheresoever its own debt burden is allocated the problem remains of how to pay down the debt without eroding the core of its income and profit generation capability. So too seems to be the problem for ETI.

[the_doctor] 05/10/2011 16:42

At what point will people consider this cheap?!

[cerrito] 05/10/2011 09:22

surprised to see fall given what I thought were pretty good figures from MARS.

[m.t.glass] 04/10/2011 11:23

Share price now testing the 31.75p low of January 2009 - setting a near 15 year low if it closes below.

[the_doctor] 23/9/2011 11:09

Yes, I read an article on that report and completely agree -they make no allowance for the struggles of the pubcos

If the pubcos are so evil, there's nothing stopping others buying the pubs they sell to make 'nice' pubs

[cerrito] 23/9/2011 11:04

From yesterday's telegraph
Pub group Enterprise Inns was also suffering a hangover, easing 1½ to 39.25p, as analysts fretted over what some described as an "extremely critical" report from Parliament's Business Innovation and Skills Committee into the relationship between pub companies and their lessees.

Analysts at Panmure Gordon said the report believes what it describes as deep-seated problems within the pub industry can only be solved by statutory regulation.

But the broker added: "The Committee doesn't appear to recognise the external factors (smoking ban, recession, duty increases) that have impacted the trade over the past four years nor the progress being made which has seen a material slowdown in the rate of pub closures."

They reiterated their "buy" on Enterprise, but said it could come under short-term pressure while Peel Hunt cut its rating on the stock to "hold" from "buy".

[the_doctor] 19/9/2011 17:45

Not been above the 25day EMA for a while!

I was going to double up at 30p - hence by re-assessment of the risk
... but it didnt get there.

Hasnt managed a rally of more than about 8-10p since the start of 2011

Before that time, moves of 20-30p were quite common

A clear bounce at the low
Should help clear the way for a bigger move up IMO.
I'm still looking for an initial rise up to 60p

[the_doctor] 14/9/2011 10:17

ie. how much is this
'repayment of fixed rate securitised debt commences in 2013'



I asked what was wrong with this:

'Op cash flows of £162m in H1 2011'
'Interest payment was £97m'
'mandatory £37m of long-term loans paid off'

If there is a mandatory bond repayment aspect aside from maturity repayment, that comes ON TOP of interest costs, then there's very little room.


Re PRM
My confidence there is that they have multiple sources with which to grow revenues and become profitable. In contrast, ETI is essentially a play on - will people spend enough in pubs for them to stabilise earnings, or will earnings fall to a level at which servicing the debt becomes impossible

[the_doctor] 14/9/2011 10:13

jeffian,

as a suggestion, here is maybe where the confusion is:

I asked what was wrong with the view I'd put forward

The key issue was that on top of interest payments, in the prior period, ETI ALSO had to make repayments of bonds
My calculations assumed that after a holiday in 2012, required repayments may be similar in 2013

The simple answer may be that I was wrong about that?
Hands up, I dont know enough about the repayment schedules, hence I asked.


ie. do we know what MANDATORY (advance?) financing payments must be made out of cash over 2012, 2013, 2014, etc.?

Interest, we're agreed about, but it was the scale of additional payments - I dont mean repaying the bonds, but any payments outside of maturity.



My issue was that ETI generates so little cash flow that it can barely cope with any further deterioration of income.
Primarily because interest payments eat into so much of it.

[jeffian] 14/9/2011 00:04

doc,
I don't know what else to say. You're worried about the Securitised Bonds (the Unique estate) but, as I've told you, as at June they were £80m ahead of repayment schedule (up from the £77m you quote) and they have £103.6m cash. The explanation of the treatment of Corporate Bonds was in the Interim Report

"Securitisation and corporate bonds represent fixed rate, manageable and tax efficient debt

The £1,466 million of securitised bonds amortise over 20 years, attract a fixed interest rate of 6.3% and are secured on pub assets with a net book value of £2,246 million. The Group is currently £77 million ahead of the amortisation schedule and we expect to make advance repayments of the floating rate securitised bonds until they are fully repaid by 2012. There will then be a one year repayment holiday until repayment of fixed rate securitised debt commences in 2013.
The £1,185 million corporate bonds are non-amortising, are secured on ring fenced portfolios of freehold pubs and attract an interest rate averaging 6.5%, with the next scheduled maturities being £60 million in February 2014 and £600 million in December 2018. We will repay the £60 million 2014 bond from cash flow and expect to refinance the £600 million 2018 bond on maturity, bearing in mind that it will always be secured on a portfolio of pubs with an up-to-date valuation of £1 billion and interest cover of two times."

If you really think that ETI are going to struggle to meet interest payments then this is not for you and you should move on to better opportunities, but I find a certain irony in your concerns about a company generating several £100m in cash compared to most other stocks where I come across you which have insufficient income to even cover their overheads, never mind anything else.

[the_doctor] 13/9/2011 14:29

'Securitisation and corporate bonds represent
fixed rate, manageable and tax efficient debt
The £1,466 million of securitised bonds amortise over 20 years, attract
a fixed interest rate of 6.3% and are secured on pub assets with a
net book value of £2,246 million. The Group is currently £77 million
ahead of the amortisation schedule and we expect to make advance
repayments of the floating rate securitised bonds until they are fully
repaid by 2012. There will then be a one year repayment holiday until
repayment of fixed rate securitised debt commences in 2013.'

I'm looking at the impact these repayments have on the free cash in addition to interest

IF revenue and operating cash flow drops by say 15% in 2013 then
a) there would be no spare cash for dividends
b) they have no spare cash for improvements
c) they'd have no spare cash for further debt repayment

They'd have to sell more pubs to cover any additional spending, which clearly isnt a great scenario for stabilising earnings

if they sell off too much, then earnings would drop below a point where they'd NEVER be able to cover mandatory interest and repayment schedules

To be viable, they need to make sure that op cash flows stay sufficient to cover interest and repayments without having to sell further pubs

[the_doctor] 13/9/2011 14:19

jeffian
I stated very clearly that I was in this case, looking only at mandatory payments and without disposals

'Regarding the Bonds, they've already said that they intend to refinance, rather than repay the 2018 Bond.'

eh? I was referring to the annual payments they have to make
you appear to ignore these?
I may have it wrong


I havent been talking about paying down the debt
I'm looking simply at whether this company can have a viable business
Sure, they could cover interest even if revenue fell to zero - by selling the assets off.


my point was that if in 2013, operating cash flows have slipped by say 15%
then ETI will only just be able to cover its mandatory debt payments

that means struggling to have a viable business
it means no cash for improvements even, let alone dividends!

who would want to refinance such a business??

[jeffian] 13/9/2011 14:12

"I'm thinking about cash flows only

interest paid with cash" (yes, from revenue)
loan repayments paid with cash" (yes, from revenue, capital, or new loans)

Did you get a chance to look at the link to the Interim presentation? You can't only look at the "cash" from revenues whilst ignoring the "cash" from disposals.

Regarding the Bonds, they've already said that they intend to refinance, rather than repay the 2018 Bond.

Marks & Spencer have a £1.2bn committed bank revolving credit facility set to mature on 26 March 2013. Last year they made gross profits of £867m. I'm worried they won't be able to repay it out of cashflow. Should I be?

[the_doctor] 13/9/2011 12:25

yes scburbs - exactly - and why I said the picture may not quite be as rosy as jeffian's £70m to play around with, which I think misses the scheduled BOND repayments