(The following statement was released by the rating agency)
Oct 02 - Fitch Ratings has affirmed Marston's Issuer plc's (Marston's) class A, AB and B notes and revised the Outlook to Negative from Stable. A full list of rating actions is at the end of this release.
Total estate performance (managed & tenanted) has been flat against previous year with trailing 12 months (TTM) June 2012 EBITDA remaining at GBP127.7m, which is 1.8% lower than Fitch's base case. This slight underperformance was mainly driven by weaker than expected performance in the managed division due to both poorer weather during the summer months and continued cost pressures. However, this was partly offset by a stronger than expected tenanted division performance driven by the ongoing rollout of the franchise style 'Retail Agreement' (RA).
The managed division has continued to grow revenues with June 2012 TTM sales up year-on-year (YoY) by 2.3%. However, ongoing cost pressures (notably with double-digit growth rate on food purchasing costs) resulted in a 6.0% decline in TTM June 2012 EBITDA (with EBITDA margin down to 23.9% from 26.1%). Fitch notes that there has been a continuation of a declining trend in the managed estate performance, with the EBITDA per pub growth rate having reduced fairly consistently from 8.9% to -7.0% on a YoY TTM basis since October 2010. Despite weaker recent results, Fitch expects performance to stabilise in the medium term and maintains a positive view for the medium to long term as the core food-led/value focused strategy is expected to continue driving sales and cost increases are expected to stabilise. However, in the shorter term, the outlook is weaker, driven by a deteriorating macroeconomic environment (affecting consumer discretionary spending), which is reflected in the lower recent annual per pub sales growth (1.3% in June 2012 declining from 5.3% in October 2010).
In contrast, the tenanted estate performance has improved, mainly driven by the continued rollout of pubs operating under Marston's proprietary RA franchise. Results suggest that converted pubs have experienced a strong uplift in sales (tenanted sales up by 12.8% YoY TTM), but most importantly, they are also positively impacting profitability with TTM June 2012 EBITDA growing by 4.5%. Fitch continues to view positively management's strong pro-activeness in turning around its tenanted business, having been the first with the RAs to launch hybrid tenanted/managed pubs (giving them more control). There are currently 450 RA pubs (representing c. 29% of the tenanted estate) and management plans to have ca. 600 of them by October 2013. While results have been positive thus far, the RAs sustainable profit levels continue to remain uncertain given the relatively short operating history.
Overall, Fitch expects TTM July 2013 EBITDA to decline slightly to around GBP127m in addition to a slight decline in margin, reflecting the on-going weakness in the macroeconomic and trading environment. Thereafter, low to flat EBITDA growth is forecast as any expected gradual improvement in the broader economy would lead to improved consumer discretionary spending levels, which should benefit the pub industry.
In the long term, Fitch expects free cash flow (FCF) (EBITDA -Maintenance Capex - Tax) DSCRs for the class A, AB, and B notes to continue to fluctuate above 1.7x, 1.6x and 1.4x respectively. These ratio levels remain in line, for their suggested rating levels, with the thresholds indicated in the UK WBS criteria, albeit at the lower end, leaving little cushion for unexpected declining performance.
The Negative Outlook is underpinned by the combination of base case underperformance, a continuing weak industry and macroeconomic outlook, and the observed declining trend in managed division performance, in addition to a lack of cushion with regard to the recommended FCF DSCR levels as per Fitch' UK whole business securitisation criteria.
A decline in Fitch's base case FCF DSCR metrics to anything substantially below 1.70x, 1.60x and 1.40x for the class A, AB and B notes, respectively, (caused by any significant and continued decline in performance) could result in a downgrade of the notes.
The transaction is the securitisation of both managed and tenanted pubs operated by Marston's comprised of 278 managed pubs (representing ca. 56% of Marston's plc's managed pubs) and 1,546 tenanted pubs (ca. 97%).
The ratings actions are as follows:
GBP151.0m class A1 floating-rate notes due 2020: affirmed at 'BBB+'; Outlook revised to Negative from Stable
GBP214.0m class A2 fixed rate notes due 2027: affirmed at 'BBB+'; Outlook revised to Negative from Stable
GBP200.0m class A3 fixed-rate notes due 2032: affirmed at 'BBB+'; Outlook revised to Negative from Stable
GBP223.9m class A4 floating-rate notes due 2031: affirmed at 'BBB+'; Outlook revised to Negative from Stable
GBP80.0m class AB1 floating-rate notes due 2035: affirmed at 'BBB'; Outlook revised to Negative from Stable
GBP155.0m class B fixed-rate notes due 2035: affirmed at 'BB+'; Outlook revised to Negative from Stable