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Falling Earnings Could Force More Landlords To Close Pubs

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http://www.telegraph.co.uk/finance/newsbys...close-pubs.html

Britain's biggest pub owners face cash-flow problems in the next few years as they wrestle with high debt levels and falling earnings, credit-rating agency Moody's has warned.

"Moody's is concerned over the medium-term cash-flow generation ability of the two biggest pubcos, Enterprise Inns and Punch Taverns, relative to their outstanding debt levels in light of the challenging trading environment," the agency said. The companies' credit positions are also likely to worsen because it will be difficult to pay back debt at the same pace that earnings are falling, Moody's said.

"Moody's believes the companies will continue to experience a softening of rental incomes, lower beer sales and falling property values thoughout 2010, which will lead credit metrics to remain under pressure," said the rating agency.

Analyst Lynn Valkenaar said all pubs are facing a "possible long-term change in the lifestyle of the British drinker" as more people choose to drink cheaper supermarket-bought beer, wine and spirits at home. "This does not bode well for the industry," she said.

But Moody's expects managed pub companies, such as JD Wetherspoon and All Bar One owner Mitchells & Butlers, to fare better than Enterprise and Punch, which lease pubs to tenants.

Between them, Punch and Enterprise own more than 15,000 tenanted pubs, about 25pc of all the pubs in the UK. Punch also owns about 800 managed sites.

The business model pioneered by Punch and Enterprise, of using cheap debt to buy large numbers of pubs and service the borrowings with rental income and beer sales, has come under pressure since the credit crunch put highly leveraged companies out of favour and the smoking ban and recession drove down sales and profits.

One of Punch's largest shareholders, Schroders, last week called for the company to wind itself down. Fund manager Andy Brough reportedly called the model "a financial experiment" and said it made sense for Punch to sell all its pubs, pay back its debt and return the rest to investors.

Some industry-watchers believe Punch and Enterprise made a rod for their own backs by charging too much rent during the good times.

A review of the controversial "beer tie" – under which tenants buy beer from the pub companies in exchange for cheaper rent – is also under way, after complaints it is driving tenants out of business by charging above-market prices.

Pubs are closing at a rate of about 52 a week, up from 39 a week in the second half of last year, and Moody's does not expect any let-up in the number that are calling last orders for the final time until consumer spending improves.

Frankly it was a stupid business model that was doomed to failure.

I wonder if you could scale these problems up to macro economic level and extrapolate out what will happen if a nation keeps on borrowing and say earnings (tax revenues) drop. I wonder what the outcome will be?

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Frankly it was a stupid business model that was doomed to failure.

I wonder if you could scale these problems up to macro economic level and extrapolate out what will happen if a nation keeps on borrowing and say earnings (tax revenues) drop. I wonder what the outcome will be?

Yep. It's a problem with excessive leverage.

I thought from your thread title you were going to call it a problem with running a pub.

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Frankly it was a stupid business model that was doomed to failure.

Yep, split the property from the retail then force the retail to pay high rents. Worked for Woolworths!

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In some cases, this could be good news for pubs.

Big pubcos with too much debt can't afford to run the place as a pub - or they can no longer find a sucker landlord who will lease it from them and buy their overpriced beer.

Big old pub is then sold off cheap.

OK, some will become houses or other uses.

But this is an opportunity for someone to buy the freehold for less than a house of the same size.

Then: they can run a pub with much better prices and still make a living. Much less debt, and they can buy and sell their beer for whatever price they want.

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But this is an opportunity for someone to buy the freehold for less than a house of the same size.

Then: they can run a pub with much better prices and still make a living. Much less debt, and they can buy and sell their beer for whatever price they want.

There was a pub here, came onto the market at a ridiculously low price.

(until you read the smallprint and see it was just a three-year lease)

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