Standard & Poor's last week affirmed the ratings of Pubmaster Finance Ltd and Punch Taverns Finance Plc, following the release of interim results by the Punch Group at the end of April, which indicated that while a slowdown in consumer spending - particularly in beer sales - continued, there was no increase in the number of tenants in difficulty and there has been no deterioration in trading performance.

Both transactions, issued by Punch Taverns, continue to perform in line with S&P's initial expectations and continue maintaining a debt service coverage ratio above the required levels with no use of the liquidity facilities. The Punch Group did not say whether it plans to tap either of its two securitizations at the moment but said it would leave the option open for investigation. In the ABS markets triple-B to single-A pub spreads have moved wider relative to the water and care home sector, reported Merrill Lynch analysts. But spreads in the sector stabilized last week, however there was no active bidding for this paper.

"Last week's half-year results from Punch included like-for-like sales across the company up 3.4%; however our analysis per pub in the securitized estate showed lower turnover, and EBITDA, growth at around 1%," said analysts at Merrill Lynch.

The pubs under the Punch Group estates are all tenanted (the estates are leased out to tenants), which means that the company receives its income from the rent it receives on the estates and wholesale beer sales made to the tenant. According to the latest reports the number of pubs included within the estate has been streamlined to 4,195 from 4,304 as part of a strategy to dispose of the weaker pubs, according to Merrill Lynch analysts.

Analysts pointed out that sustained rental growth is dependent on strong fundamentals for pub beer and food sales, since rents are dependent on the sustained business success of landlords as well as improvement of the estate through disposals/acquisitions and investment and over the past 12 months, Punch taverns maintained a high level of expenditure per pub. "Although this represents significant upgrading to existing and acquired pubs [at the expense of equity investors], it remains to be seen whether this can translate into higher earnings," added Merrill Lynch analysts. "In particular, if investment is aiming to capture higher sales and margins from food business, a weakening consumer environment may not deliver hoped for profits."

S&P also raised concerns over the uncertainty of the impending smoking ban (see ASR 3/21/05) and what subsequent cashflow volatility this would bring, but noted that a combination of mitigants including the application of a no-smoking code on a voluntary basis and headroom under the rating stresses meant it was unlikely the ban would affect the ratings.

Copyright 2005 Thomson Media Inc. All Rights Reserved.

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