Fitch has updated its UK whole business securitisation rating criteria and downgraded care home deal EPIC Barchester's class A and B notes and pubco deal Mitchells & Butlers Finance's class A and AB notes. As a result of the criteria changes, all pub transactions not already on rating watch negative have also been placed on review.

Using historical transaction performance, Fitch has revised the DSCR thresholds applied in its cashflow analysis of the WBS sector. Industry caps have also been introduced to limit the effect of debt tranching because, the agency says, "financial engineering cannot completely remove a debt instrument from the fundamentals of a transaction's business profile".

Securitisation analysts from RBS appear unimpressed by the move. They note that Fitch's actions are "in effect moving the goal posts for such transactions and in doing so further undermin[ing] the credibility of the ratings on the product".

The RBS analysts believe the key concern for investors will be whether the junior notes of Greene King, Marston's and Mitchells & Butlers remain investment grade and what the future holds for the rating on the Wellington Pub senior notes. They expect some notes to be cut to junk status.

MBS analysts at Barclays Capital also anticipate downgrades. The criteria changes have already seen Mitchells & Butlers class As and ABs cut to single-A plus because of the new ceiling. In the case of the class A notes, this was a downgrade all the way from triple-A.

The BarCap analysts believe that the class B tranches of Greene King will be cut from triple-B minus to sub-investment grade. The class A and AB tranches are each expected to be downgraded by one notch, taking them to triple-B and triple-B minus respectively.

They also predict Marston's class As and ABs to be downgraded one notch to triple-B and triple-B minus respectively. However, the class B tranches are expected to be affirmed at double-B plus.

Punch A class Ms and Punch B class As could well be downgraded to sub-investment grade, but the BarCap analysts note that had already been expected. At a relatively low leverage of 3.6x, Punch A class As could be downgraded to triple-B plus. Punch A and B tranches already at sub-investment grade are expected to be downgraded by a further notch or two.

For Wellington, more extreme rating action is expected. A FCF DSCR of 1.17x for the class Bs means a downgrade from triple-B minus to single-B looks likely. More significantly, the class As have an EBITDA DSCR of 1.5x, which could see them downgraded from single-A minus to double-B.

Ratings are expected to be affirmed for Spirit and Unique, however. The latter has already seen rating actions this month (SCI 10 August), while Spirit is only held back from an investment grade credit rating by its proportion of leaseholds, according to the BarCap analysts.

Finally, they note that indicative FCF DSCRs for managed pubs have become more lenient, while tenanted/leased ratios have become more stringent. For example, typical FCF DSCRs for managed pubs have changed at the single-A level from between 2x and 2.4x to anything greater than 1.95x, while for tenanted pubs the change is from between 2x and 2.3x to anything greater than 2.05x.

All deals on rating watch negative are expected to be resolved within six months. Fitch says the application of the new criteria will not necessarily result in further downgrades. The agency also says that the industry caps will result in notes with different seniority having identical ratings.

JL