IAS 1 para 25, material uncertainty on going concern, COVID – 19, hospitality, viability statement, emphasis in audit report

Mitchells & Butlers plc – Annual report – 26 September 2020

Industry: food and drink



The Group’s business activities, together with the factors likely to affect its future development, performance and position are set out in the Strategic report on pages 8 to 38. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are also described within the Finance review on pages 41 to 44.

Note 4.4 to the consolidated financial statements includes the Group’s objectives, policies and processes for managing its capital; its financial risk management objectives; details of its financial instruments and hedging activities; and its exposures to credit risk and liquidity risk. As highlighted in note 4.2 to the consolidated financial statements, the Group’s financing is based upon securitised debt and unsecured borrowing facilities.

The Directors have adopted the going concern basis in preparing these financial statements after assessing the impact of identified principal risks and, in particular, the possible adverse impact on financial performance, specifically revenue and cash flows, of restrictions imposed by the relevant governments in the UK and Germany in response to the outbreak of Covid-19.


As at 26 September 2020, the Group had cash and cash equivalents of £158m, and undrawn committed unsecured facilities of £140m. We expect to retain significant liquidity headroom against these facilities throughout the going concern assessment period.

The Group’s primary source of borrowings is through a secured financing structure made up of ten tranches of fully amortising loan notes with a gross debt value of £1.6bn. These are secured against the majority of the Group’s real estate property assets and the future income streams generated from those properties. The periods for repayments of principal vary by class of note with maturity dates ranging from 2023 to 2036, but at a current aggregate annual debt service cost of c. £200m. Interest rate and exchange rate fluctuations have largely been fixed with currency and interest rate swaps which qualify for hedge accounting under IFRS 9 Financial Instruments. Within the securitisation structure, the Group maintains a Liquidity Facility of £295m, which is a condition of the securitisation documents. On 12 June 2020 the Group announced revised financing arrangements that had been agreed with its main creditors to provide additional liquidity and financial flexibility in order to meet the challenges presented by Covid-19. These are summarised below.

Unsecured borrowing facilities of £250m fall due for repayment in December 2021, outside the term of the going concern assessment period.

Revised facilities and covenants

During the period, and as a result of the Covid-19 pandemic, material trading restrictions were imposed on the Group and the sector by governmental authorities, including mandated closure for over three months. Mitigating action was swiftly taken which included agreeing revised arrangements in the secured financing structure with the consent of the controlling creditor of the securitisation and the securitisation Trustee. These can be summarised as:

  • a waiver of, and amendment to, the 30 day suspension of business provision, where such provision was waived because the suspension arose due to the enforced closure during the Covid-19 pandemic;
  • a waiver of the two quarter look-back debt service coverage ratio test up until July 2021 and a waiver of the four quarter look-back debt service coverage ratio test up until September 2021;
  • a waiver of the requirement to appoint a financial adviser which would otherwise have arisen for any periods where the debt service coverage ratio falls to below the required level up until July 2021;
  • a reduction in the minimum amount required to be spent on maintenance during FY 2020 and FY 2021 to reflect the operation of the Group’s business having been temporarily suspended; and
  • a waiver to facilitate drawings of up to £100m in total under the Liquidity Facility providing the Group with additional facilities in order to meet payments of principal and interest, provided such drawings are repaid in full by 15 March 2021.

In order to secure such amendments and waivers, the Group gave certain undertakings in relation to its own financing arrangements, namely, to secure the £250m liquidity facilities referred to below, and an undertaking to provide funding into the securitisation of up to £100m in line with drawings on the Liquidity Facility.

In addition, the following was agreed with the Group’s unsecured relationship banks:

  • Extension of the term of existing £150m committed unsecured facilities to 31 December 2021; and
  • The provision of an additional £100m of liquidity, also to 31 December 2021, backed by the Coronavirus Large Business Interruption Loan Scheme facilitated by the UK Government.

The Group will continue to remain in regular dialogue with its lenders throughout the period.

Full details of the Group’s debt arrangements are provided in note 4.2.

Significant judgements and base case

These revised financial arrangements provide a stronger platform for the business to meet the uncertainty ahead, therefore ensuring that liquidity is not expected to be a main concern during the going concern assessment period. Key to successfully meeting the challenge the Group faces will be the depth, duration and recovery profile of the pandemic which will, in turn, dictate the severity of imposed trading restrictions and, therefore, most importantly, the level of sales that the business is able to achieve. The level of sales drives the EBITDA of the business which is a critical measure for covenant compliance tests. The key judgements made by management in arriving at the level of sales are the trajectory of sales recovery, a return to historic trading conditions and the extent of future restrictions.

In reaching this assessment, the Directors have reviewed what they consider to be a plausible base case forecast scenario which includes the impact of the second national lockdown in England from 5 November 2020. This is assumed to be lifted on 2 December 2020 but is expected to be replaced with ongoing severe restrictions on trading in the hospitality sector, leading to an expectation of sales over the important festive trading period being over 40% lower than in previous years. Over the second quarter of FY 2021, to March 2021, sales are forecast to remain materially lower at approximately 25% down on years prior to FY 2020 (i.e. those years not impacted by the Covid-19 pandemic), reflecting management’s expectation of further local lockdowns impacting c.10% of the estate, before building back gradually in the second half of FY 2021 as restrictions become less severe, although sales are not assumed to reach the level achieved pre-Covid during FY 2021. In aggregate, sales are forecast to be 15% down against pre Covid-19 comparatives over the period following anticipated reopening in December to the end of FY 2021. Site level operating margins have been assumed to be in line with recent operating margins achieved since reopening in July 2020, which is similar to margins the business has achieved before Covid-19 related closures.

Some limited mitigation and operational cost reduction initiatives are assumed in response to these reduced activity levels, amounting to 10% of total costs, also for the period after reopening. During this time the Group is expected to continue to benefit from assistance from the UK Government, principally in the form of relief from business rates, a reduction in VAT on non-alcohol sales to April 2021 and some limited payment from the Job Retention Bonus, in respect of which the UK Government is expected to provide revised guidance. Access to the Job Retention Scheme to the extended date of March 2021 is assumed, where applicable, in order to protect employment.

Under the base case forecast, the Group continues to remain profitable with no forecast covenant breach, with the securitised four quarter look-back FCF: debt service covenant demonstrating the lowest level of headroom. In FY 2021 the Group continues to remain profitable with sufficient liquidity and no forecast unwaived covenant breaches, although a number of tests have limited remaining headroom.

Reverse stress test

The Group has undertaken reverse stress test modelling, being the identification of that level of downside forecast at which the business model becomes unsustainable for either solvency or liquidity reasons. Due to the complex capital structure of the Group, involving the interaction of both secured and unsecured estates with quarterly covenant testing, there is a very wide range of scenarios on which the reverse stress test can be constructed.

In examining vulnerabilities, management believe that further sales shortfalls are likely to be most acute for the first half of FY 2021. After the assumed reopening in England in December 2020, a deterioration beyond an average of 4% lower sales than the base case for this same period and second half sales in line with base case would result in a breach in covenants as noted below. From January 2021, some provision is assumed in this scenario for the potential for increased tariff costs on imported food and drink as a result of the risk of a no-deal or limited-deal Brexit. These costs have not been included in the base forecast model due to uncertainty and the availability of potential options to mitigate through supply chain arrangements and range changes. In the reverse stress test, management have assumed unmitigated costs to be £11m per annum.

There is a reasonably plausible scenario where the Group could experience the sales shortfalls set out in the reverse stress test which would result in a breach to its covenants. Any breach in covenants would result in a need for a waiver of the banking covenants, or for the Group to renegotiate its borrowing facilities, neither of which are fully within the Group’s control. A breach of covenants would also result in the reclassification of £1,542m non-current borrowings to current borrowings. The Directors have, however, assessed that: given the strength of the underlying business including its property estate and brand portfolio; the Group’s existing relationships with its main creditors; its historical success in obtaining covenant waivers and in raising finance; and ongoing dialogue with its main creditors, they believe that a waiver of the covenants or renegotiation of the facilities would be successful.

Given the very high degree of uncertainty resulting from the Covid-19 pandemic and resulting restrictions placed on trading in the hospitality sector, a material uncertainty therefore exists, which may cast significant doubt over the Group’s ability to trade as a going concern, in which case it may be unable to realise its assets and discharge its liabilities in the normal course of business. This uncertainty stems directly from a lack of clarity on both the extent and the duration of current tiering, local and national lockdowns and operating restrictions, such as social distancing measures, limitations on party sizes and reduced opening times, all of which have an impact on consumers’ ability and willingness to visit pubs and restaurants and, therefore, the Group’s operational performance translating to sales and EBITDA that determine the Group’s continuing covenant compliance.

Going concern statement

Notwithstanding the material uncertainty highlighted above, after due consideration the Directors have a reasonable expectation that the Company and the Group have sufficient resources to continue in operational existence for the period of at least twelve months from the date of approval of these financial statements. Accordingly, the financial statements continue to be prepared on the going concern basis. A review of longer-term viability is provided on page 39 which assesses the Group’s ability to continue in operation and meet its liabilities as they fall due over a longer, three year period.


In accordance with Provision 31 of the 2018 UK Corporate Governance Code, the Directors have undertaken an assessment, including sensitivity analysis, of the prospects of the Group for a period of three years to September 2023.

Assessment period

Consistent with the previous year, three years continues to be adopted as an appropriate period of assessment as it aligns with the Group’s planning horizon in a fast moving market subject to changing consumer tastes in addition to economic and political uncertainties, and is supported by three year forecasts as approved by the Board. This period also aligns with the triennial process for pensions valuations, a key consideration in respect of future cash flows. Furthermore, beyond this period, performance is impacted by global macroeconomic and other considerations which become increasingly difficult to predict, a good example of which is the impact of the current Covid-19 pandemic.

Assessment of prospects

The Group’s financial planning process comprises a detailed forecast for the next financial year, together with a projection for the following two financial years. The Group’s strategy provides long-term direction and aims to protect the viability of the business model given prevailing and evolving market and economic conditions. The Directors’ assessment of longer-term prospects has been made taking account of the current and expected future financial position and the principal risks and uncertainties, as detailed within the Annual Report.

At the current time uncertainty facing the business is at an unprecedentedly high level. The principal source of this uncertainty is the Covid-19 pandemic and the consequential trading restrictions which have been, and are expected to continue to be, imposed on the business. This has inhibited the Group’s ability to trade freely, thereby reducing sales and activity. Longer-term sources of uncertainty include prevailing cost headwinds such as wage inflation, evolving consumer demands and tastes and the economic and political environment.

Key factors considered in the assessment of the Group’s prospects are a strong market position with a broad range of brands and offers trading from a well-positioned and largely freehold estate, supported by capital investment focused on premiumisation of offers and an appropriate remodel cycle, all contributing to historic outperformance against the wider market.

Assessment of viability

The current funding arrangements of the Group consist of £1.6bn of long-term securitised debt which amortises on a scheduled profile over the next 16 years. Covenants are tested quarterly, both on an annual and a half year basis, although as set out in the note to the accounts on Going Concern, a refinancing was undertaken during the year resulting in a number of waivers through to July and September 2021 being obtained. Unsecured committed facilities of £250m were also in place at the year end, having been increased and extended during the refinancing exercise. These facilities expire within the three year term of this assessment, in December 2021 and, at the current time, the Group has no reason to conclude that they will not be refinanced ahead of their expiry.

Given the significant impact of Covid-19 on the environment in which the Group is operating, the principal short-term risk facing the business comes from future restrictions imposed by Government in response to the pandemic, thereby inhibiting activity and sales income. The Group has reviewed a number of forecast scenarios and sensitivities around the depth, duration and recovery profile of the pandemic, including additional stress testing that has been carried out on the Group’s ability to continue in operation under extremely unfavourable operating conditions. In assessing the impact of these, the Group has considered the impact of temporary Government support where such measures have already been announced – notably relief from business rates until April 2020, a reduction in the rate of VAT on selected products until March 2020, and the Job Retention Scheme, including some potential benefit similar to the Job Retention Scheme Bonus yet to be finalised by the Government following the extension of the Job Retention Scheme. Whilst the experience of Covid-19 is expected to lead to lasting changes in both customer behaviour and competition in the hospitality sector, in making this assessment the Group has taken the view that the material adverse impact of Covid-19 on sales, through trading restrictions, will be temporary in nature and should not extend to any material extent beyond 2021. In 2022 and 2023, the Group is forecasting sales growth of between nil and 3%.

The Group’s three year plan takes account of the impact of Covid-19, in addition to the prevailing economic outlook, capital allocation decisions and significant cost headwinds that are expected to recur each year, alongside planned mitigating activity such as improved operational efficiencies (stock and labour management), improved digital marketing capability and energy efficiency to manage these costs. The resilience of this plan is assessed through the application of forecast analysis, including reverse stress test modelling, as detailed more extensively in the Going Concern note to the accounts, focused in particular on the impact of Covid-19 and Brexit in the current financial year as well as on a longer-term basis on sensitivities around the impact of the following risks described in the Annual Report:

  • Declining Sales Performance (Risk 3) by 2% in 2021, 2022 and 2023;
  • Cost of Goods – Price Increases (Risk 10) by 2% in 2021, 2022 and 2023;
  • Wage Cost Inflation (Risk 7) by 2% in 2021, 2022 and 2023; and
  • A scenario combining all of the above three sensitivities which reduces EBITDA by £31m, £45m and £46m in 2021, 2022 and 2023 respectively (2021 being a part year).

Liquidity and solvency based on financial covenants (Risk 1) on both secured debt and unsecured facilities are assessed in all scenarios based on the assumptions in relation to refinancing stated above. In all scenarios the Group continues to remain profitable with sufficient liquidity and no forecast unwaived covenant breaches, although a number of tests have negligible remaining headroom under the combined scenario.

Viability statement

The Directors have concluded, based upon the extent of the financial planning assessment, sensitivity analysis, potential mitigating actions and current financial position that there is a reasonable expectation that the Group will have sufficient resources to continue in operation and meet all its liabilities as they fall due over the three year period to September 2023. However, given the very high level of uncertainty around the extent and duration of current trading restrictions, and the material uncertainty highlighted in the going concern assessment, the viability of the business over the three year assessment period remains uncertain.


3. Material uncertainty relating to going concern

We draw attention to note 1 in the financial statements, which indicates that a material uncertainty exists that may cast significant doubt on the Group and parent Company’s ability to continue as a going concern.

The primary source of borrowing for the Group is secured loan notes of £1.6bn at 26 September 2020 (2019 £1.8bn), secured on the majority of the properties owned by the Group as at 26 September 2020, the Group had cash and cash equivalents of £158m, and undrawn committed unsecured facilities of £140m. The existing £150m of revolving credit facilities (RCF) was renegotiated and extended to 31 December 2021 with associated covenants being re-negotiated to reflect new post-Covid trading.

There are covenants attached to both the secured loan notes and the unsecured revolving credit facilities. As part of the revised arrangements noted above it was agreed to waive the six month look-back debt service coverage ratio test up until July 2021 and the 12 month look-back debt service coverage ratio test up until September 2021. The covenants are tested quarterly, are based around the Group’s net worth, debt service, and restricted payment conditions. Consequently, it is most sensitive to the macroeconomic recovery and performance of the Group over the short term trading period.

Management has performed a reverse stress test on the forecast and identified that a further average decline in sales of 4% or more from in the first six months of the year in combination with factoring in some additional tariffs from Brexit would result in a breach in covenants within the going concern period. Management has determined that the decline noted in the reverse stress test is reasonably plausible and we concur with this assessment. A breach in covenants would lead to the need for the Group to negotiate further waivers or renegotiate its borrowing facilities, which the Group have been successful in doing historically.

The Audit Committee has included the adoption of the going concern basis of accounting as a key risk on page 72.

In response to this, we:

  • used specialists to perform testing on the mechanical accuracy of the model used to prepare the Group’s cash flow forecast;
  • considered the consistency of management’s forecasts with other areas of the audit, including the right of use asset impairment review and revaluation of freehold and long leasehold properties (including consideration of management’s experts view of the likely recovery);
  • challenged the key assumptions within the going concern assessment including the key assumptions in the performance over the festive period and sales recovery trajectory. We have challenged with reference to the historical trading performance, current trading uncertainty, market expectations, Government announcements and peer comparison;
  • obtained an understanding of the financing facilities available to the Group, which involved the use of restructuring specialists and included understanding repayment terms and covenant definitions;
  • assessed the impact of reverse stress testing on the Group’s funding position and covenant calculations, including the appropriateness of coronavirus and Brexit assumptions;
  • assessed and challenged the mitigating actions available to management, should these be required to offset the impact of the forecast performance not being achieved;
  • assessed the appropriateness of risk factors disclosed in the Group’s going concern statement and the financial impact of those risk factors; and
  • challenged the sufficiency of the Group’s disclosures over the going concern basis and material uncertainties arising.

As stated in note 1, these events or conditions, along with the matters as set forth in note 1 to the financial statements, indicate that a material uncertainty exists that may cast significant doubt on the Group’s and the parent Company’s ability to continue as a going concern. Our opinion is not modified in respect of this matter.