Bonds from pubs, clubs and restaurants have dropped in value after the latest measures to slow the spread of coronavirus, underscoring the risk to UK high-yield debt investors from the market’s heavy exposure to consumer demand.
The leisure industry is struggling under the pressure of a 10pm curfew imposed in England last month, as well as the “rule of six” limit for gatherings, and similar measures in force in other parts of the UK.
Wagamama, which serves Japanese-inspired dishes and is owned by London-listed Restaurant Group, has £225m worth of debt due to mature in 2022 that is now trading at about 93p on the pound. The bonds had recovered some ground after the UK’s national lockdown began to be eased in June, only to fall back following the latest curbs.
Vivek Bommi, managing director at asset manager Neuberger Berman, said the debt was trading at “stressed levels”, given how close the bonds were to maturity — reflecting the threat to the company’s earnings from the coronavirus measures. Peers PizzaExpress, Ask and Zizzi have all become casualties of a collapse in footfall owing to the pandemic.
The 10pm curfew has had a detrimental impact on businesses that rely on the night-time economy, with some pub groups preparing to make heavy job cuts.
Stonegate, which runs the Slug & Lettuce and Yates bars, seized on the reopening of the leisure sector in July to sell £1.2bn of bonds financing its takeover of the UK’s largest pubs operator, Ei Group. But the £950m bond, which priced at 100p on the pound, has slipped to 92p.
“The issue for these pub companies is how to get through the liquidity gap between current trading and [the time when] we’ve put Covid behind us,” said Jonathan Butler, co-head of global high yield at PGIM Fixed Income.
Many types of leisure businesses are struggling. Low levels of attendance and delays to blockbuster movies forced Cineworld to announce on Monday that it would indefinitely close its US and UK screens. Cineworld has $3.4bn worth of term loans, which began the year trading at face value, but are now changing hands at about 60 cents on the dollar, according to one loan investor.
PureGym, the UK’s largest exercise chain with more than 260 locations, has also suffered a bond sell-off. The company has £430m in debt trading below 90p on the pound, compared with highs of 105p at the start of the year. Last week rating agency Fitch downgraded PureGym’s bonds from single B to single B minus, pushing it deeper into “junk” territory.
Last month, the group’s private equity owner Leonard Green & Partners agreed to a £100m cash injection to bolster the company’s balance sheet. Meanwhile, PureGym’s bankers — which include Barclays and Jefferies — are sitting on a roughly £400m hung bridge loan that financed the company’s takeover of rival Fitness World in January.
The wider sector could be hit by “another wave of downgrades”, depending on the direction of social restrictions, said Mr Bommi at Neuberger Berman. “If you have a lockdown [reimposed] you could see the [rating] agencies take action.”