MOODYS: British pubs will have difficulty servicing their debt if business does not improve

LONDON — Ratings agency Moody’s warned that bundles of pubs’ debt will suffer over the next 12-18 months, as earnings are hit by a decline in demand for beer, a weak pound and rises in the national living wage and inflation.

“Debt serviceability and leverage of rated transactions show early warning signals,” Moody’s said, referring to the difficulty pubs are having in using cash-flow to service their debt.

The credit rating firm said that “debt multiples have largely shown a downward trajectory in recent years. However, there are signals that the decline is slowing and may potentially start rising.”

Pubs have been hit by a general consumer spending slowdown, as well as changing tastes and fashions.

“Pub operators’ earnings are being curtailed by changes in consumer demand away from beer consumption as well as macroeconomic factors,” said Thomas Rahman, an analyst at Moody’s, said in the note.

The changing landscape

In 2011, pubs across the UK were closing at a rate of 29 per week, and the number of pubs in the UK fell by almost 10,000 between 1997 and 2015. Between 2000 and 2016, total beer sales in the UK also fell 23.5%, from 140.5 million barrels to 107.5 million barrels. This, said Moody’s, can be explained by a combination of the availability of cheap alcohol at supermarkets, lower levels of disposable income post-financial crisis, growing health concerns and the 2007 ban on smoking indoors.

However, pubs’ turnover has remained generally stable, as many have turned to selling food and rebranded to become gastro-pubs and incorporate restaurants, and Moody’s estimates food sales now represent about half of total pub sales. The work needed to convert pubs, however, requires substantial upfront costs, which has limited free cash flow growth.

Brexit and wider economic changes

The rise of the national living wage — which went up to £7.50 per hour in April 2017 — has also negatively impacted profits: Moody’s estimates that Spirit’s employments costs will rise by about £8 million, while M&B will spend an additional £28 million on wages. The planned further increase to £9 by April 2020 is also predicted to cause problems.

Aside from the impact it has already had on inflation and a weaker pound, Brexit poses a more direct risk to the future of pubs: a significant proportion of the food and drink sold at pubs is imported, and Moody’s expects costs to rise by 5% year-on-year until 2019.

“Annual wholesale food inflation had increased to 6% in March 2017… and inflationary costs pressures are anticipated to continue through the second half of the year and into next year at a similar level,” M&B reported in its H1 2017 results.

To help offset rising costs, pub wholesalers have turned to selling land adjacent to pubs, as well as leasing some of their properties to other businesses or selling outright.

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