Punch - Post refi

Dear All,

Please find our updated analysis of Punch here.

Following its refinancing in Q325, 7% YTW seem adequate for the better of the two UK pub companies. Yes, that is Punch being better than Stonegate as the latter is battling with far higher elasticity than this almost entirely wet-led estate. Idiosyncratic opportunities to raise EBITDA are largely behind us now, but inflation is generally good for the business and, for now at least, EBITDA is growing at approx. 10% p.a. on that basis. If you are interested in a place to park some cash, Punch could be your name.

Investment Considerations:

- Punch bonds are trading at 7% YTW ('29 call at par). We are not buyers at this level as the credit is too solid to offer the returns we target. Asset coverage of the bonds is strong, making Punch a fair investment for yield-focused buyers, but not sufficiently attractive for our mandate. 

- Among the two HY-issuing pub companies in the UK, Punch are the weaker without a doubt. But in an inflationary or low Consumer Confidence / Disposable Income environment, the wet-led high L&T exposure benefits from being more engrained in peoples' everyday lives (inelastic demand) and thus allows for better pass-through of altogether milder cost inflation than what the food-serving managed pub estates are exposed to. 

- Fortress’ strategy of converting L&T pubs into managed partnerships has begun to deliver improving IRRs, but the pace of conversions remains slow relative to estate erosion, meaning long-term growth in consolidated EBITDA is still uncertain.

- Relative to Stonegate, Punch has less exposure to discretionary, late-night city-centre spending, which could limit upside in a consumer rebound, though offering resilience in downturns given the rural and community bias of its estate.

Key Conclusions:

- Performance has stabilised, with EBITDA supported by estate expansion, selective conversions, and cost management, but volume growth remains negligible and easing inflation limits further revenue gains.

- Punch has used its rural and small-town exposure, alongside inflation, to maintain demand and pricing power, while driving high-return pub conversions.

- Despite strong asset backing, cash flow coverage is weak, with run-rate FCF of ~£55m covering interest only 1.4x.

- Structural headwinds continue to weigh on the UK pub sector through long-term closures, reduced discretionary spending, and declining alcohol consumption.

- Punch’s concentration in rural and suburban pubs has shielded it from the sharper downturn facing city pubs.

- The estate is skewed toward Leased & Tenanted pubs (75%), with Management Partnerships (25%) providing an entrepreneurial model that reduces costs, CapEx, and direct labour exposure compared to peers.

- Management is pursuing a strategy of converting L&T pubs into MP pubs to better control input costs and enhance profitability.

- Loose documents, strong collateral: Sponsor flexibility is high given weak covenants, but extensive security means value should break in the Notes.

- Recovery over control: Credit strength lies in collateral recovery, not covenant protection.

Here to discuss this name with you,

Benicio and Wolfgang

E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk