OREANDA-NEWS. Fitch Ratings has revised the Outlook on Unique Pub Finance plc's (Unique) class A, M and N notes to Stable and affirmed them at 'BB', 'B+' and 'B', respectively. A full list of rating actions is at the end of this commentary.

The revision of the Outlook to Stable from Negative is primarily driven by the significant deleveraging (offsetting the only minor improvement in free cash flow (FCF) debt service coverage ratios (DSCR)) and reflects our expectation of ongoing performance stabilisation over the next two years and the forecast continued deleveraging. The class A notes are also supported by a significant cash reserve and liquidity facility, while the junior notes are supported by their ability to defer and the eight years of high coverage following significantly reduced debt service from around 2024, the combination of which makes them unlikely to default, in Fitch's view.

The affirmation is driven by improving operational performance, with Enterprise Inns plc's (ETI) like-for-like (LFL) net income for the 12 months to September 2015 (a proxy for Unique) growing 0.8%, the improving quality of the estate (supported by on-going disposals of weaker pubs) and deleveraging during the year. Full-year reported Unique FCF to June 2015 of GBP133.0m also outperformed Fitch's base case by around 1%. Compared with the previous year, the FCF decline of 1.6% is less than the 3.1% reduction in the average number of pubs during the year.

Unique Pub Finance plc is a tap issue closed in 2005 of an existing securitisation of a portfolio of leased pubs located in the UK, issued by Unique Pub Finance plc. It is 100% owned by ETI, a listed UK pub company. As of end-June 2015, the securitised group comprised 2,472 tenanted pubs (representing around 50% of the estate), down from 3,974 since the tap.

KEY RATING DRIVERS
Industry Profile: Midrange
The operating environment is viewed as 'weaker'. While the pub sector in the UK has a long history, trading performance for some assets has shown significant weakness in the past. The sector is highly exposed to discretionary spending, strong competition (including from the off-trade), and other macro factors such as minimum wages, rising utility costs and regulatory changes (with the recent introduction of the mandatory free-of-tie option). Licencing laws and regulations are moderately stringent, and managed pubs and tenanted pubs (i.e. non-full repairing and insuring) are fairly capital-intensive. However, switching costs are generally viewed as low, although there may be some captive market effects. The sector is viewed as reasonably sustainable with the strong pub culture in the UK expected to persist, thereby taking a large portion of the eating-drinking-out market.

Sub-KRDs: operating environment - weaker, barriers to entry - midrange, sustainability - midrange.

Company Profile: Midrange
LFL net income declined YoY 2009-2013 by a compound annual growth rate (CAGR) of 2.7%. However, in the 12 months to September 2014 and 2015, ETI achieved LFL net income growth of 1.4% and 0.8%, respectively, indicating some sustainable stabilisation. Management has been stable with low key man risk, and there are no known corporate governance issues. ETI is also a large operator within the pub sector with economies of scale. However, use of branding is limited and there are no minimum capex covenants. As the estate is fully leased or tenanted, insight into underlying profitability is weak. Operator replacement is not viewed as straightforward but should be possible within a reasonable period of time. Centralised management of the estate and common supply contracts result in close operational ties between the securitised and non-securitised estates.

The pubs are considered to be reasonably well-maintained and over 90% of the estate is held on a freehold or long-leasehold basis. At the latest revaluation in September 2014, the Unique estate was valued at GBP1,751m, resulting in a fairly high average pub value of GBP708k. In the past few years, management has channelled disposal proceeds into capex for its existing estate with ETI spending on average around GBP13.6k per pub in 2015. Management intends to act similarly in 2016. While there is no capex covenant, upkeep is largely contractually outsourced to tenants on full repair and insuring (FRI) leases (approximately 60% of the estate). The secondary market is reasonably strong and there is also alternative use value potential (primarily as residential property and mini-supermarkets).

Sub-KRDs: financial performance - weaker, company operations - midrange, transparency - weaker, dependence on operator - midrange, asset quality - midrange

Debt Structure: Class A - Midrange, Class M, N: Weaker
The debt is fully amortising but there is some concurrent amortisation with the junior tranches. Debt service is high for the next seven years and the debt profile is not aligned with the company's and industry's risk profile, particularly in relation to the junior class M notes. Positive factors include fully fixed-rate debt, which avoids any floating-rate risk and senior-ranking derivative liabilities. The security package comprises comprehensive first ranking fixed and floating charges over borrower assets. Prepayments and purchases result in debt service being one year ahead under the restricted payment condition (RPC) calculation, making Unique compliant with its RPC, which allows cash up-streaming. This is a significant credit negative, although recently less cash has been up-streamed, possibly as a result of the very high contractual debt service. Structural features include a GBP65m cash reserve (representing 5.6% of the principal outstanding) and a GBP190m tranched liquidity facility covering around 16 months of peak debt service, which together help mitigate the tight DSCRs. The SPV is not considered to be a true orphan SPV as the share capital is owned by a subsidiary of Unique and the majority of its directors are not independent.

Sub-KRDs: debt profile: class A - midrange, class M and N - weaker, security package: class A - stronger, class M and N - midrange, structural features - weaker

Peer Group
Unique's closest peers are Punch Taverns and the hybrid tenanted/managed pubcos such as Marston's and Greene King. In relation to the class A, M and N notes, the coverage and leverage metrics look well aligned relative to peers, supporting the Stable Outlook.

RATING SENSITIVITIES
Positive - Any improvement in Fitch's base case FCF DSCRs above around 1.5x, 1.2x and 1.1x for the class A, M and N notes, respectively, due to further stabilisation in performance, in addition to further deleveraging, could trigger positive rating action.

Negative - Any deterioration of the forecast FCF DSCRs and/or an increase in leverage could trigger negative rating action. In relation to the recent change in regulation (market rent only option), there is some uncertainty as to the ultimate impact, and this could affect the ratings in the medium term (with potential increased costs, disruption of tenanted model).

TRANSACTION PERFORMANCE
Under the base case FCF is forecast to grow at a CAGR of around -1% to legal final maturity of the class N notes in 2032. The resulting base case projected FCF DSCRs are 1.46x, 0.98x and 0.91x. for the class A, M and N notes, respectively. Notably, the significant improvement in class A projected metrics since the previous review is primarily due to a mechanical effect of them being calculated over a shorter period of lower coverage versus the previous year, which is credit positive. Notably, despite the low DSCRs in relation to the junior class M and N notes, all interest and principal payments are expected to be made under Fitch's base case, aided by Unique's cash reserve and liquidity facility, in addition to the eight years of high debt service coverage from 2024.

EBITDA leverage (including the cash reserve) has reduced significantly during the year to 5.06x, 6.71x and 8.10x through the class A, M and N notes, respectively, from 5.53x, 7.16x and 8.54x. The leverage profile is also expected to improve as amortisation continues, to around 4.61x, 6.30x and 7.73x by June 2016 through the class A, M and N notes.

The rating actions are as follows:

GBP349.7m class A3 fixed-rate secured bonds due 2021: affirmed at 'BB'; Outlook revised from Negative to Stable
GBP404.2m class A4 fixed-rate secured bonds due 2027: affirmed at 'BB'; Outlook revised from Negative to Stable
GBP225m class M fixed-rate secured bonds due 2024: affirmed at 'B+'; Outlook revised from Negative to Stable
GBP190m class N fixed-rate secured bonds due 2032: affirmed at 'B'; Outlook revised from Negative to Stable