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Author: Greg M Koniowka
Key Takeaways
The U.K. government’s lockdown restrictions to mitigate the effect of the COVID-19 pandemic are heavily curtailing the operations of the pub estates backing U.K. pub corporate securitizations.
The pub estates have different geographic footprints and, should the regional tiering system be imposed once the national lockdown ends, their exposure to regional restrictions will differ.
The overall risk to each pub estate’s trading performance will be shaped by its geographic footprint, the regional progression of the coronavirus cases across the U.K., and the consequent restrictions put in place by the U.K. government.
In this report, S&P Global Ratings presents some key data that may be useful in assessing the exposure to increased lockdowns of each U.K. pub corporate securitization that we rate. The data focuses on the location of pubs within the pub estate backing each transaction, which is generally not the whole of each parent company’s pub estate. The overall risk to each pub estate’s trading performance will be shaped by its geographic footprint, the regional progression of coronavirus cases across the U.K., and the consequent restrictions put in place by the U.K. government, as currently dictated by a nationwide lockdown in England.
In terms of exposure to Greater London (comprising Inner and Outer London), Mitchells & Butlers Finance PLC, Spirit Issuer PLC, and Unique Pub Finance Co. PLC (The) have far greater exposure than Marston’s Issuer PLC and Greene King Finance PLC, with Marston’s having just one pub in Outer London and none in Inner London. Spirit, albeit with a relatively small estate, has the highest exposure to Greater London, followed closely by Mitchells & Butlers, with both having over 10% of their estates within Inner London.
Mitchells & Butlers has the most diversified geographic footprint, while Marston’s is the least diversified, with approximately 56% of its pubs spread across the East and West Midlands, with additional pockets in the North West, Yorkshire, and the Humber.
Greene King’s estate is heavily centered in the south east and the east of England, with another concentration in Scotland. At the end of November 2020, with the introduction of the U.K. government’s first version of its tiering system, Greene King’s concentration gave it some distance from the Midlands hotspots and those areas facing the most stringent restrictions, with Marston’s being the most exposed to local restrictions that hampered their ability to trade. However, the landscape has shifted quickly, and it is now the south east that is exhibiting the highest levels of new cases, with Greene King replacing Marston’s as the most exposed. As regional coronavirus hotspots continue to flare up and dissipate, there could be further reversals of fortune.
In terms of population center concentration, which is an indicator of the availability of outside space that helps to lessen the impact of restrictions on both social distancing requirements and bans on standing and drinking indoors, over a third of Marston’s estate is situated in a rural setting, compared with around 14% for Mitchells & Butlers and Spirit, 20% for Unique, and 25% for Greene King.
The following set of maps show the geographic footprint of each pub company on the current (Jan. 24, 2021) coronavirus landscape in the U.K., represented by the rolling seven-day new cases figure. (As reported by specimen date, divided by an area’s population and multiplying by 100,000, or the cases per 100,000) We chose a level of detail that represents the 2019 local authority districts in the U.K., which closely aligns with the Lower Tier Local Authority area type used in U.K. government’s coronavirus dashboard. Following adjustments made by the U.K. government when presenting its data, the coronavirus case data for City of London and Isles of Scilly are combined with Hackney and Cornwall respectively. Likewise, we mapped any pubs located in the City of London to Hackney, to form a combined entity, Hackney and the City of London. All coronavirus data is as of Jan. 24, 2021.
This interactive chart will be updated periodically.
Following the end of a four-week lockdown in England, on Dec. 2, 2020 the U.K. government implemented a new tiering system replacing a local COVID-19 alert level, or tiering system, whereby each local area in England was assigned a local COVID-19 tier of "medium," "high," or "very high," based on the level of infections for that area. The recommendations and rules for the tiering system and the framework for determining which tier is assigned to which area were governed by the U.K. government’s COVID-19 Winter Plan. On Dec. 20, 2020, the U.K. government expanded its tiering system to include a fourth tier, tier 4, which was a stay at home order. Pubs fall within the hospitality sector and are, therefore, subject to the restrictions applied to hospitality businesses within each tier.
In its COVID-19 Winter Plan, published in November, the U.K. government listed five key epidemiological indicators that will contributed to decisions on which area goes into which tier, which include case detection rates in all age groups and the rate at which cases are rising or falling, both of which are leading indicators for the pressure on the NHS, another of the factors considered. The table below shows a relationship between the seven-day rolling rate of new specimen cases reported for each local authority district and its tier as of Jan. 4, 2021, the day before the tiering system was withdrawn and supplanted by a nationwide lockdown with stay at home restriction.
When it was introduced, the tiering system was intended to be in effect until the end of March 2021. However, England went into a full nationwide lockdown on Jan. 5, 2021 and is expected to remain in lockdown for at least six weeks. The current restrictions on pub operators are the same as those put in place under tiers 3 and 4, with pubs ordered to close with the exception of providing takeaway for food and non-alcoholic drinks and delivery of food and drink (including alcohol) until 11 p.m.
We expect that new restrictions will continue to be introduced at the regional and local level when the U.K. government lifts the current national lockdown and, we assume, reverts to some form of tiering system. Taking the epidemiological indicators of case detection rates and the rate at which cases are rising or falling as an indicator of which tier a region may be assigned post lockdown, the chart below shows the exposure of each pub company to regional differences of each indicator. When the seven-day rolling rate of new specimen cases and its rate of change are combined, the differences in the geographic footprints between the pub companies begin to reveal their relevance. Each pub company’s estate is exposed to the general trend throughout the U.K. in the number of new cases, which have been falling over the last week. However, the differences in their geographic footprints discussed above show that those with greater exposure to regions with adverse epidemiological indicators may face greater restrict ons under a new tiering system. The distributions in table 2 show that Marston’s had the least number of pubs in regions that were under tier 4 restrictions in early January, but seem to be in regions where the rate of decline is more muted than, say, either Mitchells & Butlers or Greene King. If this trend holds, it may suggest that Marston’s pub estate may face tougher restrictions than the other pub companies.
This interactive chart will be updated periodically.
Given the current uncertainties surrounding the path the COVID-19 pandemic will take in the U.K., the prospects of and timing for a vaccine against the virus, and the U.K. government’s response, the situation remains quite fluid.
We will continue to monitor the regional progression of COVID-19 within the U.K. and evaluate the potential effects from U.K government restrictions on the expected size and duration of reductions in the securitized transactions' net cash flows. Against the backdrop of those developments, we continuously evaluate whether adjustments to our base-case and downside projections are appropriate. Changes in our projections could adversely affect our debt service coverage estimates, which, in turn, could put pressure on our ratings. If longer-term effects emerge that reshape the economy or industry, we may revise our assessment of a company's business risk profile, which could also result in rating changes.
Our ratings on 14 classes of notes from four U.K. pub corporate securitizations are currently on CreditWatch negative. The CreditWatch placements reflects the ongoing significant uncertainty surrounding the timing and robustness of the COVID-19 recovery and each issuer’s available liquidity.
As vaccine rollouts in several countries continue, S&P Global Ratings believes there remains a high degree of uncertainty about the evolution of the coronavirus pandemic and its economic effects. Widespread immunization, which certain countries might achieve by midyear, will help pave the way for a return to more normal levels of social and economic activity. We use this assumption about vaccine timing in assessing the economic and credit implications associated with the pandemic (see our research here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.
