Mitchells & Butlers Finance plc — Moody’s downgrades ratings of notes issued by Mitchells & Butlers Finance plc


Rating Action: Moody’s downgrades ratings of notes issued by Mitchells & Butlers Finance plcGlobal Credit Research – 22 Feb 2021Approximately GBP 877.7 million of notes affectedLondon, 22 February 2021 — Moody’s Investors Service (« Moody’s ») has today downgraded the ratings of five classes of Notes issued by Mitchells & Butlers Finance plc (the « Issuer »):….GBP200M (Current Outstanding amount GBP107.5M) Class A1N Notes, Downgraded to Baa1 (sf); previously on Apr 23, 2020 Downgraded to A3 (sf)….GBP550M (Current Outstanding amount GBP195.6M) Class A2 Notes, Downgraded to Baa1 (sf); previously on Apr 23, 2020 Downgraded to A3 (sf)….USD418.75M (Current Outstanding amount USD225.1M) Class A3N Notes, Downgraded to Baa1 (sf); previously on Apr 23, 2020 Downgraded to A3 (sf)….GBP170M (Current Outstanding amount GBP125.2M) Class A4 Notes, Downgraded to Baa1 (sf); previously on Apr 23, 2020 Downgraded to A3 (sf)….GBP325M (Current Outstanding amount GBP315.0M) Class AB Notes, Downgraded to Baa3 (sf); previously on Apr 23, 2020 Downgraded to Baa2 (sf)Moody’s does not rate the Class B1, B2, C1, C2 or D1 Notes.RATINGS RATIONALEToday’s rating actions reflect: a) the deterioration in the financial position of the ultimate parent company of the borrower (Mitchells & Butlers plc, « M&B »), leading to the announcement of a GBP 350M equity capital raise; and b) Moody’s expectation that the pub sector will continue to be subject to (limited) COVID-related restrictions in the short term with the potential for localised higher levels of restrictions following lifting of the current national lockdown. Moody’s notes that the equity capital raise will provide certainty on the near-term financing needs of M&B. Nonetheless, the return of full financial health to businesses within the sector has many uncertainties, and risks to cashflows remain elevated (including lower income, higher expenses and the sector’s reliance on government support measures).The rating actions reflect the significant continuing impact to the transaction of UK Government restrictions on the entertainment and hospitality sector in response to the COVID-19 pandemic. The Issuer’s main source of income is revenue generated by pubs, bars and pub-restaurants operated by entities within M&B and these cashflows have been severely disrupted in the period since March 2020. As a consequence of these restrictions and the inability of the pub & restaurant sector to operate, there have been breaches of certain covenants within the transaction. These breaches have been waived by the transaction’s controlling creditor and the notes have not been accelerated. The issued notes themselves have continued to pay interest and scheduled principal when due but in order to do so, there have been draws on the transaction’s liquidity facility. Moody’s expectation is that there will be further draws on the liquidity facility.Pubs were first required to close due to COVID restrictions on March 20, 2020, three days before the start of a national lockdown. They reopened on July 04, 2020 under social distancing protocols; operating restrictions on the sector continued to tighten through curfews, rules of six and tiered restrictions until a new national lockdown was announced on November 05, 2020 with pubs closed until December 02, 2020. Further tiers followed, with pubs in Tier 4 required to close during the Christmas trading period. Another (third) national lockdown was announced on January 04, 2021 which again required all pubs to close. Currently, M&B have no sites open. As of the date of this rating action there is no definitive date by which pubs will reopen for business.The coronavirus outbreak, the government measures put in place to contain it, and the weak global economic outlook continue to disrupt economies and credit markets across sectors and regions. Our analysis has considered the effect on the performance of corporate assets from the current weak UK economic activity and a gradual recovery for the coming months. Although an economic recovery is underway, it is tenuous and its continuation will be closely tied to containment of the virus. As a result, the degree of uncertainty around our forecasts is unusually high.We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.Methodology Underlying the Rating Action:The principal methodology used in these ratings was « Operating Company Securitizations Methodology » published in April 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1214102. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.Factors that would lead to an upgrade or downgrade of the ratings:Factors that could lead to an upgrade of the ratings include: (i) a significant improvement in the credit quality of the parent company of the borrower; and (ii) strong trading performance of the underlying pub estate, in line with pre-COVID levels.Factors that may cause a downgrade of the ratings include: (i) a significant deterioration in the credit quality of the parent company of the borrower; and (ii) weaker than anticipated trading performance of the underlying pub estate, including further periods of enforced closure.REGULATORY DISCLOSURESFor further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.The analysis includes an assessment of collateral characteristics and performance to determine the expected collateral loss or a range of expected collateral losses or cash flows to the rated instruments.Moody’s quantitative analysis entails an evaluation of scenarios that stress factors contributing to sensitivity of ratings and take into account the likelihood of severe collateral losses or impaired cash flows.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. 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