Fitch: UK Whole Business Securitization Outlook Stabilizes

Fitch Ratings says in a newly-published report that its Outlook for UK whole business securitisations (WBS) is stable, having improved from negative at the start of the year. However, exposure to UK consumer discretionary spending as well as government spending remains.

The improved outlook reflects the stabilisation of underlying operating performance for most WBS issuers, helped by growth momentum in the UK economy. In addition, the weak overall performance in recent years and subsequent negative rating actions has resulted in lower baseline performance. Fitch's WBS ratings cover mainly pubs, but also healthcare, sports, telecoms, leisure, funeral and motorway service companies.

The recent restructuring of some distressed transactions provides a more robust base compared with recent years and has removed some underperforming transactions from the portfolio. Following the restructuring in 2014 of the Punch (A&B) tenanted pub transactions, the Titan Europe 2007-1 (NHP) care home transaction unwound in early 2015 with significant losses for noteholders.

Declines in real wages in recent years and the ongoing public sector spending cuts will continue to put pressure on the sector. Pubs (particularly tenanted) are particularly exposed to changes in disposable income. Care homes are exposed to continued reductions in government spending. Managed pub groups with food-led branding should continue to outperform the tenanted pubs but still face only tepid growth.

The outlooks could improve if real wages increase and if visibility on government and local authorities' spending, notably in healthcare, increases.

Tenanted pubcos may suffer from the March 2015 change in legislation governing the beer tie, which resulted in the introduction of a statutory code with a market rent-only option. Higher letting and beer supply costs, combined with potentially shrinking revenues, could curtail earnings, but the impact is difficult to quantify at this stage.