Pub Deals To Take Hit, But Weather English Smoking Ban

The move to ban smoking in England could have a short-term impact on cash flows for the £9.4 billion ($15 billion) in whole business pub securitizations in Europe. Michela Bariletti, an analyst atStandard & Poor's, said while there could be a drop in cash flows for the first year after the ban is put into place, a recovery in the following two years would be likely. A fall in revenue won't hurt the deals as they have ample coverage to cope in a downside case, saidMichael Cox, analyst atRoyal Bank of Scotland.

Bariletti said S&P had expected the ban and had factored it into its ratings and cash flow expectations. While sales would be hit, from a securitization point of view no adverse credit impact is expected even if profits were to drop sharply, she added. The ban is likely to be enforced in summer 2007. Parliaments in Scotland and Northern Ireland have already voted to prohibit smoking in public places, with Scotland due to introduce the ban in March. Firms involved in pub whole business securitizations with exposure to Scotland will likely view it as a testing ground ahead of the law's introduction in England.

Most of the pub securitization exposure is in England. Punch Tavernsdominate with four outstanding securitizations--Punch Tavern Financing-A, the U.K.'s largest with 9,000 sized at £1.8 billion, Punch Tavern Financing-B (about 4,000 pubs and sized at £1.25 billion), as well as the smaller Avebury and Spirit transactions.Enterprise Inns,Mitchells & Butlers, andGreene Kingalso have transactions.

The majority of pubs held in these securitizations are in smaller provincial towns in England, andPaul Crawford, analyst atFitch Ratings, said this is important as the ban's impact will be less profound there than in the major cities. "Firstly, people will most likely stand outside with a drink and cigarette once the ban is introduced. In rural areas and smaller towns, this will not be seen as much of a problem as in larger urban areas, where drinking on the street is prohibited by many city authorities," he said. Also, many of these rural and provincial pubs have outdoor trading areas and beer gardens. "A smoking ban may not hit those pubs as hard, although the winter months may see a fall," he said.

Peng Sun, ABS strategist atHSBC, said since the ban is not due for another 18 months, its impact will be less than that of an immediate ban. He added that theBritish Beer & Pub Associationand individual pub companies have already moved to gradually reduce smoking in pubs by enlarging non-smoking areas. "While I agree that we could see a short-term impact on trading, with a reduction in trading volumes, it's likely they will recover. Why? Simply because the pub is a big part of British culture, and people will still go to socialize," he said. He added that some attitudes towards smoking are changing and posited that the ban could actually encourage more people to go to smoke-free pubs.