Enterprise Inns-censes investors

Moody’s decision to put Enterprise Inns on review for downgrade caused consternation among sterling investors who had bought the pub company’s debenture issues, a form of secured debt.

The rating agency’s main concern was the level of refinancing risk associated with Enterprise Inns (rated Ba2) exercising its option to buy the 83% of the Unique Pub Company that it does not already own. The threat of the debentures moving to sub-investment grade from Baa3, and thus triggering forced sellers, threw spreads out by around 35bp.

Michael Markham, fund manager at Investec, disagreed with Moody’s decision on the debentures. “We like it as a concept, but the rating agencies do not give it the necessary uplift,” he says.

He points to the added security assurances, such as over-collateralisation, the business being cash generative and the ability to pledge more assets if necessary to maintain the firm’s income and coverage ratios, as factors supporting a higher rating for the debentures. According to Moody’s, only two notches can separate a company’s corporate rating and its secured debt.

The company’s announcement that it would finance the Unique acquisition through debt also incensed bondholders. “We are disappointed they took this action as we were under the impression that Enterprise would fund the final purchase under equity and debt,” he says.

Ultimately the transaction will require both board and shareholder approval, but Ted Tuppen, Enterprise’s chief executive officer, said in a conference call last month that he intends “to move heaven and earth” to live up to his commitment of keeping his rating investment grade.

Investec’s Markham believes that the issue could be positively resolved for bondholders. “Enterprise needs the debt markets; they are an appropriate way to fund their business,” he says.

Andrew Burton, credit analyst at Royal Bank of Scotland, also has a positive view on events, but warns that the Moody’s rating panel, which ultimately makes the decision, could throw a spanner in the works.