An unbreakable bond – Pizza Express.

Blog 3 - 10/11/2019

In this week’s blog I am going to discuss Pizza Express; one of the biggest British restaurants with over 480 casual dining sites across the UK. However, it’s not always been 5* reviews for Pizza Express, especially in recent years. With its increasing levels of liabilities, bondholders are now pressing for debt restructuring, potentially involving a debt-for-equity swap. (Hancock & Thomas, 2019). In this blog I am going to look into the current debt structure of Pizza Express and the potential implications it currently faces. 

In 2014, Pizza Express was bought in a leveraged £900m buy-out by a Chinese private equity firm: Hony Capital (Culzac, 2014). A rather apt purchase considering the next big expansion venture for Pizza Express at the time was to penetrate Asian markets to maximise growth, a venture that has yet to prove advantageous for the firm. However it’s not been an easy ride for Pizza Express, fast forward from 2014 to present day and its balance sheet is weighed down by £1.1bn of net debt (Hancock & Thomas, 2019). Pizza Express’s earnings before interest, taxes, depreciation, and amortization (Ebitda) fell 11% in the second quarter, whilst its debt rose to 7.9 times Ebitda, compared to 6.6 times a year earlier (Vanuzzo & Linsell, 2019). Mark Brumby, analyst at Langton Capital said ‘Pizza Express has 14 times debt to earnings before interest, taxes, depreciation, and amortization (Ebitda). Even for a company with a large number of freehold properties, this would be extremely high’ (Hancock & Thomas, 2019). Mr Brumby also illustrated that if you were to look further into the debt, it’s equivalent to £1.6m of debt per restaurant – a value higher than the worth of each of the sites (Hancock & Thomas, 2019). The company currently has £465m of secured bonds, due to mature in in August 2021 and also £200m unsecured bonds due in 2022 (Vanuzzo & Linsell, 2019). As illustrated in the graph below, Pizza Express’ secured bonds are valued at 83p to the pound, and their unsecured bonds at 23p to the pound. Understandably, the secured bonds are higher considering that these represent Pizza Express’s senior debt and if they were to go bankrupt then those bondholders whom have the secured bonds would be paid first, a much less riskier option than being an unsecured bondholder (Vanuzzo & Linsell, 2019). Debentures, in this case in the form of unsecured bonds, are not guaranteed against any asset and so all that is given to bondholders is the company's promise that the repayments will be made on time. 

However, this is where Hony Capital continue to dig deeper to revive Pizza Express from its drowning liabilities. Hony Capital have announced that they intend to buy-back £80m of the £200m unsecured bonds that Pizza Express currently have, which are currently trading at less than quarter of their face value (Thomas & Smith, 2019). If Hony Capital are able to buy back these unsecured bonds then it would make them the biggest holder of this ‘junior debt’ aka the debt with the lowest priority of repayment, meaning that if Pizza Express were to fail then the amount of unsecured bonds would be minimised. By buying back these bonds, Hony Capital is illustrating that they view potential value in the chain by investing in the weakest part of Pizza Express’s capital structure. 

As per the above graph, once Hony Capital announced its plans to buy-back £80m of the unsecured debts, also known as debentures, the value of these bonds shot up, perhaps illustrating the rise in confidence in the owner is willing to still see value within this uncertain capital structure. The unsecured creditors whom make up the £200m of unsecured bonds, will be given one month to review Hony’s buyback offer to purchase the bonds at a discounted rate before they are required to either accept or decline the offer (Vanuzzo & Casiraghi, 2019). If Hony Capital are able to successfully buyback the proposed £80m of Pizza Express’s debt, then it will enable for the refinancing of secured debt before the maturity deadline and reduce the risk of needing a debt-for-equity swap. A debt-for-equity swap would entail giving the current bondholders the opportunity to swap the debt that they own for a stake within the business, and of course this would give these bondholders voting rights, which when simply a bondholder you have no ownership participation. However, because Pizza Express is not a publicly listed firm, it’s not as simple as offering shareholders more stocks, but for Hony Capital a debt-for-equity swap would mean diluting their ownership by giving the creditors a % of ownership in Pizza Express. Also as commonly known, debt comes at a lower cost than equity and so Hony Capital may see it beneficial to continue to refinance their senior and junior debts to prevent the dilution of ownership. However, Hony Capital would benefit from using financial analysts to find the best ways to bring this company back to the black, deciding to potentially close some of their current sites or to look into restructuring their current debt structure. 

In conclusion, Pizza Express’s current capital structure is in a state of disrepair and despite Hony Capital’s faith within the company’s value, the figures and opinions of capital analysts shows that at any point Pizza Express could fail to a point beyond repair. The potential of a debt-for-equity swap is one that Hony Capital may opt for closer to the time of bond maturity if the private equity firm struggle to refinance its current bonds. However, the dilution of ownership after already investing £900m in the purchase of Pizza Express, and £80m into the buy-back of junior debt is never a favourable one for the firm. When critically analysing the current state of Pizza Express, their expansion plans into Asia hasn’t brought the diversification capital benefits that they initially hoped, and Hony Capital are having to employ further capital to assist in the minimisation of junior debt that the company has incurred. If Hony Capital choose to continue with their venture into Asia and the Middle East they are going to have to employ a significant amount of capital to make it a worthwhile investment, with many other competing companies diversifying into Asia, Pizza Express have lost any chance of benefiting from first-mover advantage. Has Hony Capital become too complacent and are refusing to accept the reality of Pizza Express's failing capital structure? With the current financial uncertainty of Brexit looming, consumers are more savvy with their disposable incomes and the high street is failing, so where do Pizza Express go to gain back some of their brand identity in this current corporate quandary of debt. I think the closure of some of their poorer performing outlets may need to occur and they need to regain focus on innovation rather than copy-cat actions to mimic their competitors, it simply isn’t working. Do we think Pizza Express can claw its way back to profitability? The jury’s out on this one… 

List of References 

Culzac, N. (2014, July 12). Pizza Express sold to Chinese private equity group Hony Capital for £900m.Retrieved from The Independent: https://www.independent.co.uk/news/business/pizza-express-sold-to-chinese-private-equity-group-for-900m-9602063.html

Hancock, A., & Thomas, D. (2019, October 7). PizzaExpress bondholders press for debt restructuring.Retrieved from Financial Times: https://www.ft.com/content/18ec966e-e91c-11e9-a240-3b065ef5fc55

Thomas, D., & Smith, R. (2019, November 6). PizzaExpress’s Chinese owner to buy back chain’s debt.Retrieved from Financial Times: https://www.ft.com/content/dda91e4e-007a-11ea-be59-e49b2a136b8d

Vanuzzo, A., & Casiraghi , L. (2019, November 6). Pizza Express's owner starts tackling debt with bond buyback.Retrieved from Bloomberg: https://www.bloomberg.com/news/articles/2019-11-06/pizzaexpress-s-owner-starts-tackling-debt-pile-with-bond-buyback

Vanuzzo, A., & Linsell, K. (2019, October 4). PizzaExpress Hires Advisers Ahead of Debt Talks With Creditors.Retrieved from Bloomberg: https://www.bloomberg.com/news/articles/2019-10-04/pizzaexpress-hires-advisers-ahead-of-debt-talks-with-creditors