(Debtwire) Stonegate trading improves ahead of approaching maturity wall as investors consider securitisation plays
03 Apr 2024 17:35 BST
Stonegate remains highly levered ahead of an approaching whopping July 2025 maturity wall. But the UK-based pub group’s recent trading has been improving with significant earnings uplift initiatives targeted. A base-case amend-and-extend transaction for the senior secured notes remains likely, but securitisation debt also remains a possible way to gain exposure to the credit story, according to four buysiders and an independent special situations desk.
Stonegate’s B3/B+ rated GBP 1.235bn 8.25% senior secured 2025s are indicated at 97.25-mid yielding 10.3% to worst, while its B3/B+ rated EUR 496m Euribor+ 575bps senior secured 2025s are indicated at 97.25-mid on IHS Markit.
Peer Punch’s B3/B+ rated GBP 600m 6.125% senior secured 2026s are indicated at 96.875-mid with a 7.7% yield on Markit.
The company’s management, led by CEO David McDowall and CFO Dave Ross, told investors on its 1Q23/24 earnings call on 28 March that it can deliver its GBP 495m run-rate earnings growth guidance within three years. The company is also making progress on addressing its upcoming July 2025 debt maturities.
Stonegate’s trading for the 1Q23/24 period (quarter-end 14 January 2024) was encouraging with adjusted EBITDA for the 16 weeks ended 14 January 2024 of GBP 117m up versus GBP 104m for the 16 weeks ended 15 January 2023, according to the company financial statements.
The performance was positive given the earnings results were posted against a strong 2022 comparable period that had included the World Cup in November and December 2022. Christmas 2023 trading was also strong while 1Q23/24 sales grew and EBITDA margins improved to 21.8% with a material reduction in energy costs.
Current trading post-quarter-end and heading into 2Q23/24 has also been supportive. The company noted in its investor presentation that 2Q23/24 was also still showing good growth in the Leased and Tenanted (L&T) and Operator-led businesses. It was also noted that 2H23/24 offers an opportunity with the Euros, Premier League run-in and National Living Wage rises all boosting disposable income with wage growth being greater than inflation.
The company’s management on the 1Q23/24 earnings call explained that it can deliver its GBP 459m group current run-rate EBITDA target within 24 months, and reach its GBP 495m total run-rate EBITDA within three years. They explained that this incremental earnings bridge was mainly reflective of the restricted group EBITDA when an investor asked about how much of the benefits relate to its Project Platinum transaction. The company’s LTM 1Q23/24 Managed and Tenanted (MAT) group EBITDA was GBP 389m.
One buysider noted he is sceptical on the EBITDA uplift and stated that while there has been some progress, the company is not in a great spot and leverage is still high. He argued that there are still a whole set of challenges and cost inflation will not go away, adding that while underlying earnings can improve through price initiatives, this will not be easy and the problem is footfall with fewer people visiting pubs. The first buysider noted a recent press report that pub insolvencies have hit a decade high.
“We are sceptical on the EBITDA uplift initiatives but still think they can get to GBP 478m by FY25/26 from GBP 389m. The market is in good shape and they reported good numbers even if 2Q23/24 could be a little softer,” a second buysider said. “The probability of an amend-and-extend has reduced and par refi increased slightly but we still think an amend-and-extend is more likely than a par refi.”
Stonegate and the deleveraging wait
The company remains highly levered with roughly 8x net leverage (including leases) at 1Q23/24, according to Debtwire analyst calculations (see analyst capital structure at bottom of article).
Stonegate previously announced plans to sell 1,034 pubs to unrestricted subsidiaries. The transaction, dubbed Project Platinum, had been structured as an asset sale where Stonegate will move the 1,034 pubs to unrestricted subsidiaries. Stonegate and its restricted subsidiaries would receive GBP 609m cash proceeds, funded by a secured whole-business loan, and also a GBP 201m promissory note issued to Stonegate that will have a 14% PIK coupon and mature eight years from the transaction date (see chart below).
Source: Stonegate 1Q23/24 investor presentation
The company previously disclosed to investors in its 4Q22/23 results that the entire group property portfolio was externally revalued on 24 September 2023 and that the valuation was GBP 4.1bn. The estate largely comprised of freehold pubs representing 81% of the entire estate. Management broke down this valuation further on the 4Q22/23 earnings call and noted that the Project Platinum portfolio was valued around GBP 0.9bn, the Unique portfolio at GBP 1.5bn and the remainder, being the restricted group portfolio, is GBP 1.7bn.
Stonegate will need to refinance GBP 2.3bn of debt maturities due in July 2025, according to its financial report. Going concern language in the 1Q23/24 financial report noted that the base case assumes that the GBP 638m raised from the committed Project Platinum transaction is available to the wider Stonegate Group and GBP 248m of RCF due to expire in September 2024 is extended for at least another year on current terms. It was also disclosed in the going concern language that “the Directors have also considered the significant portion of debt that expires in July 2025. There is a risk that should the GBP 2.3bn debt not be refinanced, the group would not have the ability to repay it when it falls due. Plans are being formulated to refinance the debt, but these haven’t been executed at the date of approval of these financial statements.”
Including the Unique securitisation bonds as part of a wider refinancing could be a solution, leading to potential upside for the securitised notes, the first buysider said. “They can refi (debt including) the securitisation even if the business is not in great shape fundamentally. Through 2023 their Operator-led segment had good results and an amend-and-extend could lead to negative sentiments when trying to refi later. A par refi is possible if they sound out investors in a professional way.”
The second buysider noted that he is assuming that the company would extend the first liens into 2027 while the second liens mature in 2028. He noted there may be an ask of the second liens to PIK coupons as part of a negotiation but added that value breaks in the second liens in a conservative scenario, although one can also make a creative case where the second lien is money good. He assumes the second liens will remain outstanding if any amend-and-extend transaction of senior secured notes occurs.
Unique upside potential
Stonegate will also consider refinancing its Unique entity securitisation debt as part of a broader refinancing, according to management on the 1Q23/24 earnings call. One option out of this plan would be an early take-out of the securitisation structure which would involve a GBP 36m make-whole payment.
Buying the securitisation debt could be an attractive way to gain exposure to Stonegate given there remains upside in the securitisation junior bonds should a make-whole be considered. The securitisation debt also benefits from better collaterals versus participating in the senior secured notes. The Unique Group debt has been raised through the issuance of notes secured on the Unique Estate portfolio of pub properties.
The company’s Unique Pubs B-rated GBP 189m 6.464% securitised N bonds are indicated at 104.75-mid (up from 100-mid on 16 February) while the Unique Pubs BB+ rated GBP 156m 5.659% securitised A4 bonds are indicated at 99.25-mid on IHS Markit.
“A lot of value is tied up in the securitisation box (overcollateralised) so they could potentially deal with the securitisation bonds to unlock value in the structure (which could then be used to help refinance/repay the senior secured bonds). Our trade idea is that there is a make-whole call on the securitised bonds, with upside [for investors] versus existing prices,” a third buysider said. “It’s a small price to pay to refinance. There’s also little downside risk, because one is covered already in the securitised instruments. They did Project Platinum so they still have the cash from that which could be used to redeem the securitised notes at the premium.”
A fourth buysider argued he does not think the company would go for the make-whole as it is too expensive. But he added that investing in the Unique structure means you get the benefit of the best asset value and access to increased collateral with a better opportunity to sell to investors. He still thinks the second liens have to extend but has also been looking at peer Punch where the debt is covered by the asset value and operating entity with more bond price upside than with Stonegate.
“The existing bonds in the high 90s clearly signal their belief in the refi. Following last week’s reporting, management will be looking to estimate interest among the bondholder community, but they might just have to post some more improvements before they can deal elegantly with the whole cap stack via a normal refinancing,” independent special situations desk Sarria said. “The second liens don’t need to be addressed in an amend and extend, but look a bit messy in a normal refinancing of the senior secured notes.”
Talks were ongoing between Stonegate, its sponsor TDR Capital and bondholders to address the company's upcoming debt maturities. The company is being advised by Evercore and Kirkland & Ellis, while first lien bondholders are working with Jefferies and Willkie Farr & Gallagher, according to a Debtwire 30 January 2024 report.
Efforts to refinance its upcoming debt maturities may require a possible amend-and-extend scenario if an orthodox par refinancing looks difficult. However, the company should be able to extend first lien debt maturities without requiring second lien loan holder consent, according to Christine Tadros, European Managing Director of Debtwire sister service Xtract Research, and Fox Legal Training founder and covenant expert, Sabrina Fox.
Click HERE for the Debtwire Stonegate FY22/23 credit report.
The Stonegate capital structure as of 1Q23/24 is broken down below:
“I am pleased to report a very strong quarter, which included a sector-leading Christmas trading period. We have delivered a rise in revenue and a significant increase in profitability. Our all-round performance exemplifies the strength and depth of the Stonegate estate, with our outstanding Craft Union and L&T divisions continuing to lead the way. This is testament to the hard work of our people and partners, but also to the success of our on-going initiatives to increase profitability across our portfolio of brands and venue format,” Stonegate CEO David McDowall noted.
“Our performance gives me real confidence in the future and excitement in seeing our strategy come to fruition. Notably our asset optimisation plan which makes sure we have the right pub in the right location, further profit improvement initiatives, and above all our efforts to continue to support the Great British pub,” the Stonegate CEO said. “With a summer of sport on the horizon, and the Euro’s and T20 World Cup fast approaching, we are looking forward to building on this momentum in the months ahead.”
TDR Capital declined to comment.
by Adam Samoon and David Orbay-Graves with capital structure by Priyanka Kotadia