Investors Bet the British Pub Isn’t Dead Yet

Investors Bet the British Pub Isn’t Dead Yet

British pub company Stonegate Pub Co issued the biggest sterling-denominated junk bond since 2013 on Friday to help finance the takeover of one of its rivals.

The TDR Capital-owned company, which runs familiar high-street chains including Walkabout and Slug & Lettuce, sold 950 million pounds ($1.19 billion) of fixed-rate bonds this week, the biggest since Virgin Media issued 1.1 billion pounds of senior secured notes in 2013, according to Bloomberg data. Stonegate’s sterling notes were priced at 8.25% on Friday

The latest offering adds to a list of M&A-linked deals that had been put on hold earlier this year and are tapping the market now that conditions have improved. That has helped the high-yield bond market to recover strongly following a six-week lull that lasted until mid-April. June alone recorded 12.8 billion euros in issuance, the busiest month since November.

Stonegate’s bond is part of a bigger debt sale to replace the 1.8 billion pounds worth of debt underwritten by a group of banks, led by Barclays Plc, Goldman Sachs Group Inc. and Nomura Holdings Inc., nearly a year ago when the pub group agreed to buy EI Group. The financing was upsized to 1.9 billion pounds in February.

Read more: U.K.’s Wary Pub Goers Overshadow Stonegate’s Debt Market Return

Earlier indications guided the sterling notes to yield in the 8-8.25% range, a “tight” price talk that does not “adequately compensate investors for the execution and financial risks of the combination, considering the post COVID-19 market situation and complexity of the structure,” Lucror Analytics wrote in a note on Friday.

“While we believe that the path to recovery following the pandemic will be challenging for Stonegate, the group appears to have flexibility in adjusting its cost base and capital investments,” they added.

One of the main challenges Stonegate’s highly leveraged business will face in the coming months is how to lure people back to pubs, but liquidity seems fine, at least for now, said Nicholas Campello and Mateo Salcedo, analysts at Spread Research in a phone interview.

While the terms of the deal are tighter than other recent transactions in the sub-investment space, there are still some areas of concern for investors, CreditSights analysts wrote in a note on Thursday.

Among these, CreditSights analysts highlight that the assets guaranteeing the new debt exclude those from a subsidiary that represents almost 40% of the group’s holdings and 30% of the combined earnings.

A representative for TDR declined to comment.

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