All of the notes in the Unique Pub Finance securitisation have been downgraded one notch by Fitch because of concerns over the stability of Enterprise Inns' business model. The class A notes have become sub-investment grade, dropping from triple-B minus to double-B plus.

Fitch says that despite an improvement in the trailing 12-month (TTM) June 2011 free cashflow (FCF) per pub of around 1%, it is concerned that aggregate FCF has continued to decline annually by over 6%. While the increased FCF per pub is mainly because of pub disposals, proceeds from those disposals have not led to an effective deleveraging, as the agency notes the EDITDA-to-debt multiple has increased since March 2010 from 8x to 8.3x.

In the long term, Fitch says that without further financial support from Enterprise, FCF DSCR for the class A, M and N notes could hit lows of 1.2x, 1x and 0.9x respectively. The transaction will resume amortisation in September 2012 if no more class A2N notes are prepaid, so the agency is concerned about the long-term pressure on FCF that a prolonged plateau in debt service would provoke, leaving the FCF DSCR close to its minimum level.

Fitch expects TTM June 2012 FCF to further decline by over 2.5% to below £155m. Despite favourable credit enhancements, the agency believes that there are fundamental financing problems, which may be exacerbated by long-term uncertainty over the tenanted pub business model.

In particular, the agency is concerned by the nature of Unique's business model. It says that the lack of a managed division - which Spirit, Marston's and Greene King each have - prevents Unique from stepping into the actual operation of the pubs, which remain mainly wet-led, with food sales representing less than 25% of total turnover.

A combination of the economic downturn and 2007 smoking ban have made Unique's exposure to tenanted wet-led pubs a problem, argues Fitch, especially as beer duty has increased by 35% over the past three years. Macro concerns, such as the uncertain job market and rising operating costs, are also negative factors.

Securitisation analysts at Barclays Capital describe the rating action as "a little harsh" for several reasons. They expect EBITDA-to-debt levels at the class A level to fall from 6.1x in FY11 to 5.3x by FY14 and note that the current ratio of 6.1x is consistent with investment grade. For example, Greene King junior notes - which are rated triple-B minus - are currently at 7.6x.

The BarCap analysts also suggest that the sub-investment grade rating for the Unique class As appears inconsistent with Fitch's investment grade rating for the class Ms in Punch A and class As in Punch B, so future action on those tranches can be expected.

Further, the analysts say that Enterprise is likely to reverse the £30m surplus it receives from procuring beer at the group level at a lower cost than it sells to Unique. "This would improve Fitch's expected minimum FCF DSCR for the class As to 1.5x from 1.2x. We think it very likely that Enterprise would choose to do this since a default in Unique would likely result in a renegotiation of the beer supply agreement, resulting in Enterprise losing this surplus anyway," they explain.

Unique is a securitisation of 2,945 leased and tenanted UK pubs owned by Enterprise Inns. The class A2N floating-rate bonds, A3 fixed-rate bonds and A4 fixed-rate bonds have each been downgraded from triple-B minus to double-B plus. The class M fixed-rate bonds have been downgraded from double-B to double-B minus, while the class N fixed-rate bonds have been downgraded from double-B minus to single-B plus.

The downgrades mean that the class A notes will be removed from the iBoxx index at the end of the month.

JL