Providing credit for working capital, refurbishment, expansions and capex investment
AIB recognises the importance of the sector not just to the bank but to the wider economy, as well as the contribution it makes to our vitally important tourism industry. AIB understands the licensed pub trade and is committed to supporting licensed pub customers. The bank has been actively involved in providing both existing and new customers a wide range of financing solutions from working capital to funding acquisitions and capex investment. We have dedicated relationship managers across our corporate, business centre and branch banking operations with the knowledge and expertise to support licensed pubs customers and to deal with the challenges and opportunities that lie ahead.
There is no denying that the past few years have been very difficult for the licensed pub trade. On-trade sales have dropped by 34% over the past five years while alcohol consumption nationally has decreased by 11% since 2001. This has led to a significant number of pub closures over the past few years and it is widely accepted within the industry that there may be more casualties in the future. For the pub sector, like many others sectors, the economic downturn has created numerous challenges including the reduced consumer spending and changing consumption habits. While we would hope that the economy is now in recovery, consumer spending has still not returned to historic levels. Other issues which have a direct impact on the sector are the introduction of tougher drink driving legislation, the smoking ban in pubs and the temporary 9% VAT rate. Any change to this rate would have a significant impact on the sector which would have implications for both the licensed pub trade and the broader tourism sector.
These challenges have been further compounded by a sizeable debt overhang within the sector and the oversupply of pubs which is particularly pronounced in rural locations. In the boom times, business was so good for the licensed pub trade that the turnover numbers spoke for themselves and the information required by the banks in support of credit applications was limited. Applications were based on the value of the asset not on the free cash flow available to service debt or the business and marketing plans that underpinned that cash flow. This approach had to change and AIB needs to help customers understand why, and outline what the bank now expects to see in important areas like financial management, business forecasting and in assessing an application for credit. Repayment capacity is paramount in all the banks dealings with customers and we rigorously assess whether or not the business can repay the loan without hampering its growth potential or its future viability. Capital expenditure is also an important part of the mix for some pubs, particularly those in more urban areas that may have to reinvent themselves every few years. The bank fully understands and appreciates the need for pubs to reinvest in their business and it is important that a business does not suffer because of a lack of investment.
For any application AIB will look at identifying the core sustainable level of underlying cash flow that underpins the business. This is also stress-tested for possible future factors such as interest rate increases. If the free cash flow can meet the repayment requirements of the credit requested then the bank will look to provide the facility whether it be for acquisition, expansion or refurbishment.
Our research shows us that there is a polarisation of pubs taking place, with some Dublin pubs experiencing growth with the vast majority of pubs experiencing a decline. However, the research also shows us that publicans are resilient and are adapting to the changing consumption habits through improving /increasing their food offering and creating a pub “experience” through music/quizzes etc. Publicans know that they are competing with cheaper off trade sales and so the visit to their pub must offer more than just beverages. With overall tourism numbers on the increase more and more publicans are also tapping into the tourism market for customers and it is no surprise to learn that a visit to an Irish pub is cited by tourists as one of the top “things to do in Ireland”. Despite these challenges the pub sector is core for the Irish economy and is a significant employer. At a time when a number of the other Banks have been withdrawing from the market, AIB is actively supporting the sector providing credit for working capital, for refurbishment, expansion and Capital Expenditure investment (Term debt, leasing and asset financing) while also working with many pubs in financial difficulty. AIB will continue to provide credit to viable businesses, whether that is to new or existing customers, and to continue to support the sector into the future.
Brian Gallagher, Senior Manager, AIB Corporate Banking will be speaking at the Gathering 2016 event on the topic of Funding Sources.