Fitch Affirms Mitchells & Butlers Finance's Notes

Dec 10 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has affirmed Mitchells & Butlers (LSE: MAB.L - news) (M&B) Finance's class A, AB, B, C and D notes. Class A and AB notes are on Stable Outlook and class B, C and D notes are on Negative Outlook. A full list of rating actions is provided at the end of this commentary.

Mitchells & Butlers Finance is a whole business securitisation (WBS) of a portfolio of 1,437 managed pubs, pub restaurants in Britain owned and operated by M&B plc (representing 87% of plc's pubs).

KEY RATING DRIVERS

The affirmations primarily reflect M&B Retail Limited's (M&BR; the borrower) stable performance, which was, however, only just in line with Fitch's base case with FY13 (financial year to September 2013) EBITDA growing 1.1% to GBP364.1m (versus GBP365m in Fitch's base case). The Negative Outlook on the class B, C and D notes reflects the increased likelihood of a rating downgrade of those tranches given that their revised projected Fitch's base case free cash flow (FCF) debt service coverage ratios are merely within their rating thresholds, as per Fitch's UK WBS criteria. Fitch may take negative ratings actions, notably, if performance falls short of Fitch's revised base case or if future like-for-like sales growth is not more in line with historical performance of around 2% (2.5% 11-year CAGR) - making this year's dip in sales growth to 0.8% just a one-off event.

Fitch's base case expects M&BR's FY14 EBITDA to grow 1.4% to above GBP369m. This growth derives mainly from a pickup in sales per pub (driven by food sales) while EBITDA margin is expected to remain flat at 23%. Thereafter, EBITDA is forecast to grow mildly over the next 10 years at below 1.5%, before easing off in the long term. The resulting Fitch's base case FCF DSCRs - minimum of the average and median FCF DSCRs to the notes' legal final maturity - for the class A, AB, B, C and D notes are marginally down year-on-year, respectively, to 3.30x (from 3.32x), 2.66x (2.69x), 1.72x (1.75x), 1.58x (1.60x) and 1.54x (1.55x).

However, for the more junior class B, C, and D notes, the DSCRs are just in line with their rating thresholds, having dropped by almost 0.1x on average since FY12.

Continuing decreasing leverage, due to both the amortisation of the class A1N, A2, A3N, and B1 notes and, to a lesser extent, increasing EBITDA, partially mitigates the class B, C and D notes' tight Fitch's base case FCF DSCRs. Net (Frankfurt: NETK.F - news) debt/EBITDA has on average fallen year-on-year by 0.1x and currently stands at 2.3x for the class A, 3.2x for AB, 4.7x for B, 5.4x for C and 5.7x for D notes.

The transaction also continues to benefit from solid WBS credit enhancements such as cash-lock up conditions, tranched liquidity facility, and an annuity-like debt profile (reducing in the later years), which, unlike other UK WBS transactions, removes point-in-time stresses and gives more performance downside protection to the notes closer to their respective maturity.

RATING SENSITIVITIES

The Negative Outlook on the class B, C and D notes reflects the increased likelihood of a downgrade in case of underperformance versus Fitch's base case.

The challenges which may potentially weigh negatively on the transaction's future performance include the fragile UK economy (with UK average weekly earnings declining by 7% in real terms since 2008) and M&BR's potential exposure to an expected significant increase in M&B plc's large GBP400m pension deficit, notably if M&B plc unexpectedly fails to pay for the extra pension contributions (currently in negotiation until early 2014 with the pension trustee to potentially above GBP40m per annum). Additional industry-specific issues are the on-going change in consumer behaviour (with continuing declines in beer volumes), rising operating costs (with rising utilities) and on-going competition from the off-trade.

The Stable Outlook on the more senior class A and AB notes is supported by the significant headroom residing in the credit metrics for the level of the notes' ratings. The notes ratings are constrained by the industry rating caps, as highlighted in Fitch's UK WBS criteria, namely 'A+' for the pubs industry.

The rating actions are as follows:

Class A1N floating-rate notes (GBP178.3m) due 2030: affirmed at 'A+'; Outlook Stable

Class A2 fixed-rate notes (GBP324.4m) due 2030: affirmed at 'A+'; Outlook Stable

Class A3N floating-rate notes (USD373.3m) due 2030: affirmed at 'A+'; Outlook Stable

Class A4 floating-rate notes (GBP170m) due 2030: affirmed at 'A+'; Outlook Stable

Class AB floating-rate notes (GBP325m) due 2033: affirmed at 'A+'; Outlook Stable

Class B1 fixed-rate notes (GBP198.4m) due 2025: affirmed at 'A-'; Outlook Negative

Class B2 fixed-rate notes (GBP350m) due 2030: affirmed at 'A-'; Outlook Negative

Class C1 fixed-rate notes (GBP200m) due 2032: affirmed at 'BBB+'; Outlook Negative

Class C2 floating-rate notes (GBP50m) due 2034: affirmed at 'BBB+'; Outlook Negative

Class D1 floating-rate notes (GBP110m) due 2036: affirmed at 'BBB'; Outlook Negative