Pub industry pressures causing ‘early warning signs’ over debt, Moody’s warns

The UK’s debt-laden pub giants are ­beginning to struggle because of a squeeze on earnings and rising costs, according to an industry stress test by ratings agency Moody’s.

Analysts said publicans are facing a perfect storm of rising business rates, labour costs and inflation, as well as falling beer consumption and fears about a consumer spending downturn. The onslaught has been pushing down profitability since last year, making it harder for operators to service borrowings. Punch Taverns and Mitchells & Butlers, two of the UK’s largest names, could breach debt covenants by the end of next year, if wages and inflation both rise by 5pc year on year, Moody’s claims. Spirit, which was purchased by Greene King in 2015, would avoid a breach, according to the analysis.

Consumer spending data
Fears are rising about a consumer spending squeeze

Thomas Rahman, Moody’s assistant vice president, said that rising costs and inflation caused by the fall in the pound, which makes imported goods more expensive, were starting to have an impact. The warning is significant given the high debt piles several pub companies had in the lead-up to the financial crisis, which triggered a wave of defaults and restructuring.

Moody’s acknowledged the “stress case” scenario was not its base case ­because companies could work to mitigate cost rises. But it cited commentary from Mitchells & Butlers about how wholesale food inflation had increased to 6pc in March 2017, and also noted the national living wage was due to hit £9 per hour in 2020 from its £7.50 rate now. Punch and Greene King also both have tenanted and leased pubs and could face pressure from the Pubs Code.

Greene King bought Spirit in 2015
Greene King bought Spirit in 2015

This legislation enables tenants to opt for the MRO, or market rent ­option, whereby they are no longer forced to buy beer from the company that owns their pub through the ­so-called beer tie and can just pay them rent. But Mr Rahman said pub operators remained profitable and were becoming more innovative with their property portfolios. Many are selling adjacent land to other developers or converting pubs to dwellings.

“We expect this trend to carry on as the pub industry continues to experience structural declines,” he said.

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