Preliminary Results

PUNCH TAVERNS PLC

("Punch" or "the Group")

Preliminary Results for the 52 weeks to 17 August 2013

Underlying financial performance* - in line with guidance

· EBITDA of £216 million (2012: £238 million)

· Profit before tax of £49 million (2012: £64 million)

· Basic earnings per share of 5.7p (2012: 7.2p)

· Strong cash position; £329 million of cash reserves

· Net debt decreased by 6% or £122 million

Operational KPIs*

· Improving like-for-like trends in net income**, with core estate net income

· up 0.4% in the fourth quarter

· down 2.4% for the 52 weeks to 17 August 2013 (ahead of guidance of -3% to -4%)

· Average net income per pub +1.5% across the year

· 96% of the core estate let on substantive agreements, up from 94% at August 2012

· 433 pubs disposed for £149 million, £11 million ahead of book value and at a multiple of 18 times EBITDA

Operational headlines

· Continued progress delivering the business plan:

Core estate:

· Recruitment: 96% of the estate let on substantive agreements, ahead of our target range of 93% to 95%; letting activity and applicant numbers up 17% and 28% respectively

· Investment: Ahead of plan with 476 pubs invested in at an average spend of £102,000

· Food development: Food mix up another 3 percentage points to 27%

· Increased field support:New Business Development Division to provide increased support to all newly launched businesses over their first six months

· Punch Buying Club: Membership in its fourth year, increased to c.90%, up from 72% at August 2012

· Punch Foundation Tenancy: Under this new arrangement we provide Partners with a newly refurbished pub and a full range of support. With 48 pubs operating under this agreement, drink sales have grown c.50% and we plan to extend to c.200 pubs in 2014

Non-core estate:

· Disposal programme on track, realising total net proceeds of £149 million in the year. Following the improvement in the performance of a number of pubs in the non-core division, 116 pubs have been transferred to the core division from the start of the new financial year.

Capital structure update

· Punch has continued an extensive process of engagement with a broad range of stakeholders across the capital structure (including the ABI Special Committee of noteholders and its advisers) to discuss feedback, and continue to build a broad base of support for the restructuring.

· Whilst the process of engagement has taken longer than previously anticipated, the Board believes that a consensual restructuring can be launched in the fourth quarter of the 2013 calendar year and will provide an update on the implementation of the restructuring in due course.

Stephen Billingham, Executive Chairman of Punch Taverns plc, commented:

"We have delivered profits for the year in line with our expectations and returned the core estate to growth in the most recent quarter.

We have made excellent progress in implementing operational changes during the course of the year and this is reflected in our recent financial performance. Pubs in which we have invested have shown significant improvement in performance and the core division accounts for over 80% of Group EBITDA.

Expectations of future net income growth for the core estate remain unchanged from those previously announced, with a return to like-for-like net income growth of up to 1% expected in the 2014 financial year."

25 September 2013

_______________________

* before non-underlying items

** net income represents revenue less cost of drink sales (gross profit)

Enquiries

Forward-looking statements

This report contains certain statements about the future outlook for Punch. Although we believe our expectations are based on reasonable assumptions, any statements about future outlook may be influenced by factors that could cause actual outcomes and results to be materially different.

The preliminary results presentation will be available on the Punch website www.punchtaverns.com from 9.00 BST. A webcast of the presentation will also be available.

PRELIMINARY RESULTS FOR THE 52 WEEKS TO 17 AUGUST 2013

EXECUTIVE CHAIRMAN'S REVIEW

OUR AIM: TO BE THE HIGHEST QUALITY, MOST TRUSTED AND BEST VALUE LEASED PUB COMPANY

MARKET POSITIONING

Punch is a leading operator of leased and tenanted pubs in the United Kingdom. At 17 August 2013, the Punch estate comprised 4,096 pubs located across the UK, 96% of which were held on a freehold or long leasehold basis. In addition, Punch owns 50% of Matthew Clark (Holdings) Limited, the holding company of the Matthew Clark business, a leading drinks wholesaler and distributor.

Punch's long-term aim is to become the UK's highest quality, most trusted and best value leased pub company. Punch's core estate represents a higher quality, geographically well-located portfolio of 2,990 pubs at 18 August 20131 which is suitably positioned to adapt to changing market conditions and support sustainable long-term growth for Punch and our Partners.

The plan for the core division is to build on the platform created by the Pathway to Partnership programme to drive sustainable growth. The aim of the core division is to make each pub the best of its type in its marketplace. The focus is on attracting the right Partners through new lease offers, investment to drive sales (including food), an increase in the field support teams and expansion of the Punch Buying Club.

The plan for the non-core division, which comprised 1,106 pubs at 18 August 20131, is to maximise short-term returns with a clear focus on costs and cash flow. Approximately 1,100 non-core pubs have been disposed of since the division was created in 2011. The remaining non-core pubs will largely be disposed of over the next four years with disposals phased to ensure a balance between the speed of disposal and value achieved. The majority of non-core pubs are on substantive agreements and will therefore continue to have access to the same operational support infrastructure as our core pubs, to assist in driving operational performance until the decision is made to dispose of them.

BUSINESS REVIEW

Overall profit performance is in line with guidance provided earlier in the year. In the 52 weeks ended 17 August 2013, Punch generated EBITDA of £216 million (excluding non-underlying items):

Core estate

The core division accounted for 82% of Punch outlet EBITDA with average net income per pub being more than double that of the non-core division at c.£74,000 per pub.

Trading through the year has benefited from the operational improvements delivered in the business, ending the year with a return to like-for-like net income growth of 0.4% in the fourth quarter, having had three consecutive quarters of improving like-for-like trends. Like-for-like net income for the full year declined by 2.4% which represented a 1.3% point improvement on the previous year.

Positioning the core estate for sustainable growth is being driven by:

Recruitment: The percentage of core pubs let on substantive agreements ended the year at 96%, above our target of between 93% and 95%. With the new recruitment website now firmly embedded, we are generating high levels of new applicants up 28% on last year.

Investment: We plan to invest in around two-thirds of the core estate over the next five years focussing on improving the customer environment, targeting £40 million per annum across 400 schemes per year. We have exceeded our target this year, investing in 476 pubs at an average spend of £102,000. This investment is transforming the customer offering in these pubs and we are achieving our target returns for these investments.

Food development: Investments are partly structured to drive increased food sales which represent a significant opportunity to our Partners. Our five year target is to increase the food sales mix from an estimated 22% in 2011 to 35% of Partner revenue. We estimate that food sales now make up 27% of Partner revenue, up another 3% points from August 2012. 87% of our Partners now operate a meaningful food offer, up from 77% in 2011.

Increased field support: From the start of the new financial year we have launched a dedicated New Business Development team. This specialist team has been put in place to support all new Partners with the initial investment, the launch of their pub and throughout their first six months of trading. We are confident that the addition of this support to new Partners with a focus on the retail offer to consumers will help drive sales, improve Partner profitability and reduce the level of Partner failures. At the same time we are maintaining the levels of support provided to existing Partners, now complemented by the mystery visit programme which has been rolled out across the core estate. The programme offers detailed feedback from an independent observer, highlighting operating strengths and development opportunities.

Punch Buying Club: Having launched the Punch Buying Club just over three years ago, approximately 90% of our core pubs are now members of the club. Through the Buying Club we have been able to offer a range of industry leading exclusive offers to our Partners which included completion of the roll-out of free Wifi across our estate during the year. We will continue to build on the success of the Buying Club over the next year as we introduce a wider range of products and services for the benefit of our Partners.

Punch Foundation Tenancy: The new Foundation Tenancy agreement (formerly referred to as "Franchise Tenancy") is a fully supported open book agreement, providing new Partners with a newly refurbished pub, best practice operating standards, marketing and pricing support, food and drink menu set up and a range of business management tools. Whilst still in the early stages of roll-out with 48 pubs operating on the new agreement, we have seen a c.50% growth in drink volumes in these pubs. This new agreement has now been rolled out nationally and a significant proportion of the lettings within the new financial year are expected to be operated on this new agreement, with the expectation that we will have c.200 pubs operating on this agreement by the end of 2014.

Non-core estate

The non-core division accounted for 18% of Punch outlet EBITDA at £43 million. These pubs are predominantly small, wet led and have a much lower profit per pub at c.£30,000, with average profit per pub being down 5% on last year. Given the limited scope for investment, these pubs are more likely to be impacted by the long-term decline in drinking out and as a result are expected in time to generate more value through disposal than retention.

Maximising short-term returns: While these non-core pubs remain in our portfolio, we remain committed to driving operating performance and maximising the profits from these outlets. Net income in non-core pubs on substantive agreements declined by 2% in the year on a like-for-like basis, with the majority of the decline coming from non-substantive pubs in the process of disposal. 

Following the improvement in performance of a number of pubs in the non-core division, 116 pubs have been returned to the core division from the start of the new financial year. These pubs have an average net income per pub of c.£59,000 and delivered £6 million of outlet EBITDA in the year.

Maximising value on disposal:  During the year we sold 433 pubs (including 60 pubs from the core division), together with other assets for proceeds of £149 million, £11 million ahead of book value.  The disposed pubs generated just £8 million of EBITDA in the year to disposal, equating to a disposal multiple of 18x, demonstrating the accretive nature of these disposals.

Matthew Clark joint venture

Matthew Clark, the 50% joint venture with Accolade, has performed strongly in the year, in what continues to be a very competitive market. The post-tax contribution to Punch of £4.8 million for the year represents a 40% increase on the prior year. Matthew Clark has significant scale in its marketplace as the largest independent drinks wholesaler and distributor to the UK leisure and hospitality industry, with gross annual turnover of c.£800 million to c.20,000 customers. Turnover increased by 9% in the joint venture's last financial year and the business has clear plans for continued growth in market share from which Punch will benefit.

Regulatory

Punch is committed to developing a responsible approach in working with our Partners and in the marketplace in which we operate. We were the first pub company to have its Code of Practice accredited by BIIBAS following the release of version six of the industry framework code in March of this year. The Code of Practice covers everything from starting up and the day-to-day running of a pub business, to seeking advice and what to do at the end of an agreement.

On 8 January 2013, the Department for Business, Innovation and Skills (BIS) announced plans to establish a new statutory code of practice and an independent adjudicator for the leased and tenanted pub sector. This was followed by a formal consultation process launched on 22 April 2013 and which closed on 14 June 2013, in which we participated. We do not believe that further government intervention and red tape would benefit the industry. We already support the two independent complaint review bodies available to licensees, and these review bodies are working well for all parties concerned. PIRRS exists to provide low cost resolution for rent disputes and our Partners are able to take complaints relating to any other part of our Code of Practice to PICAS.

Pubs play a vital role in the economy providing local employment particularly for young people and we continue to engage with Government on the need for investment in the sector as a key part of the wider growth agenda for the UK economy.

Capital Structure Update

Punch has continued an extensive process of engagement with a broad range of stakeholders across the capital structure (including the ABI Special Committee of noteholders and its advisers) to discuss feedback, and continue to build a broad base of support for the restructuring. Whilst the process of engagement has taken longer than previously anticipated, the Board considers that a consensual restructuring can be launched in the fourth quarter of the 2013 calendar year and will provide an update on the implementation of the restructuring in due course.

FINANCIAL REVIEW

Results for the 52 weeks ended 17 August 2013:

Underlying profit performance is in line with management expectations with the core estate having returned to like-for-like net income growth in the most recent quarter. Results have benefited from the ongoing investment programme but have also been impacted by the ongoing disposal of non-core pubs and selected disposals of core pubs.

Revenue declined by 7% to £458 million with a 9% decline in underlying EBITDA. This compares to a reduction in the average estate size of 9%.

Net underlying financing costs decreased by 4% to £154 million primarily due to the reduction in net debt of £122 million. The weighted average interest rate for the Group's borrowings, including the impact of interest rate swaps, at the balance sheet date is 6.9%. Underlying profit before tax was £49 million, a decrease of 23% on last year. The tax charge before non-underlying items of £11 million equates to an effective tax rate (excluding joint venture) of 24.7%.

Non-underlying items

There is a net non-underlying loss after tax of £17 million. This includes a £16 million credit arising from the movement in the fair value of certain interest rate swaps together with a £39 million charge relating to the recycling of a proportion of the hedge reserve, an £11 million profit on disposal of properties, a £10 million charge for asset write-downs, a £4 million goodwill charge and an £8 million charge for restructuring costs. The tax effect of all of these items, together with the resolution of prior year tax matters, gave rise to a tax credit of £15 million.

Earnings per share

Underlying basic earnings per share have decreased by 21%. to 5.7p. The basic earnings per share of 3.2p has been impacted by the non-underlying items detailed above.

Dividends

The Board is not proposing to recommend a final dividend for the year, and it is unlikely that the Board will be able to recommend any distributions to shareholders prior to the implementation of a restructuring.

Cash flow

The Group has been cash generative across the year. Strong cash generation of £188 million at the operational level has enabled the Group to continue to invest in the Punch estate with £58 million of capital investment. Cash flow has been further enhanced by £149 million of cash generated from disposals.

Capital structure

Punch is financed through two whole business securitisations, the Punch A securitisation (£1,449 million of gross debt) and the Punch B securitisation (£884 million of gross debt), as well as certain cash resources held across the Group. As at 17 August 2013 the Group held £329 million of cash resources (of which £108 million was held outside the securitisation structures, which includes £31 million held within the Group supply company and Employee Benefit Trust).

Although the securitisations have generated underlying profits and positive net cash flow before debt service in the year, they continue to require financial support through the use of cash resources held outside of the securitisations to maintain compliance with their DSCR (Debt Service Cover Ratio) covenants. Without this support, both the Punch A and Punch B securitisations would breach their respective DSCR covenant levels.

The Group has provided financial support to the securitisations in the year to allow the completion of the capital structure review, identification of a restructuring solution for each securitisation and discussions with stakeholders in relation to the proposed restructuring. Net support from cash resources held outside of the securitisations amounted to £23 million for the year, being £88 million of gross support less £65 million of cash payments from the securitisations to the wider Group during the year. The net cost of continuing financial support in the new financial year, should this take place, would be expected to be significantly higher than the level of the cost incurred in the past year.

The scope for the Group to continue to provide ongoing financial support to either securitisation is constrained by the financial linkages between the Punch B securitisation and the Group and the expectation that the Group, as part of the proposed restructuring solutions, will commit a substantial majority of its cash resources to deleveraging the Punch B securitisation.

We expect a consensual restructuring for both securitisations to be launched in the fourth quarter of the 2013 calendar year. Failure to effect a restructuring solution for either securitisation in the near-term may result in a covenant default in the relevant securitisation.

Going concern

In determining the appropriate basis of preparation of the Annual Report, the Directors are required to consider whether the Group can continue as a going concern for the foreseeable future; that is for at least 12 months from the date of signing of this Report. After making enquiries, and considering the matters which are described in note 1 to this announcement, the Directors have concluded that it is appropriate to prepare the Financial Statements on a going concern basis. However, the Directors are making full disclosure, as required by accounting standards, to indicate the existence of material uncertainties facing parts of the business. Further details are set out in the note 1 to this announcement.

Board changes

On 1 February 2013, Roger Whiteside resigned as Chief Executive Officer to take up the position of Chief Executive of Greggs plc.

To ensure continuity in the leadership of Punch, particularly during the ongoing discussions regarding the restructuring proposals, Stephen Billingham was appointed as Executive Chairman and Neil Griffiths was appointed as Chief Operating Officer.

Stephen Billingham has been Non-executive Chairman since September 2011. Neil Griffiths was previously Punch's Property and Turnaround Director and has been with the Group since 2001. He has 25 years' experience in the leisure and hospitality industry having held senior management roles in Warner Brothers and Bass.

On 25 October 2012, John Allkins joined the Board as an Independent Non-executive Director. John brings with him a significant amount of consumer and business development experience to the team, having been Group Finance Director of MyTravel Group plc and Chief Financial Officer of Equant NV. John has considerable experience in chairing audit committees in a number of public and private companies.

John replaced Ian Fraser, who retired from the Board in December 2012 having served 8 years as an Independent Non-executive Director.

Stephen Billingham

Executive Chairman

CONSOLIDATED INCOME STATEMENT

for the 52 weeks ended 17 August 2013

1 EBITDA represents earnings before depreciation and amortisation, profit on sale of property, plant and equipment and non-current assets classified as held for sale, impairment, goodwill charge, finance income, finance costs, movement in fair value of interest rate swaps and tax of the Group.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

for the 52 weeks ended 17 August 2013

CONSOLIDATED BALANCE SHEET

at 17 August 2013

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

for the 52weeks ended 17 August 2013

CONSOLIDATED CASH FLOW STATEMENT

1. ACCOUNTING POLICIES

Basis of preparation

The consolidated financial statements presented in this document have been prepared in accordance with IFRS as adopted by the European Union. The Company's financial statements have been prepared in accordance with IFRS as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006. The Company has taken advantage of the exemption provided under s408 of the Companies Act 2006 not to publish its individual income statement and related notes.

The financial statements are prepared under the historical cost convention, as modified by the revaluation of derivative financial instruments to fair value, and in accordance with those parts of the Companies Act 2006 applicable to companies reporting under IFRS as adopted by the European Union. New standards and interpretations issued by the International Accounting Standards Board (IASB) and the International Financial Reporting Interpretations Committee (IFRIC), becoming effective during the year, have not had a material impact on the Group's financial statements.

The preliminary statement of results was approved by the Board on 24 September 2013. The preliminary statement is derived from but does not represent the full Group statutory financial statements of Punch Taverns plc and its subsidiaries which will be delivered to the Registrar of Companies in due course. The financial information for the 52 weeks ended 18 August 2012 has been extracted from the Annual Report and Financial Statements 2012, as filed with the Registrar of Companies. The audit reports for both periods presented were not modified, and did not contain statements under section 498(2) or (3) Companies Act 2006 or equivalent preceding legislation.

In the 2013 Annual Report & Accounts of the Group, the auditor will include an emphasis of matter statement in its audit report relating to the uncertain outcome of the Directors' intention to restructure the Group's securitisation structures. This emphasis of matter was also included in the 2012 Annual Report & Accounts of the Group.

Going Concern

The financial statements have been prepared on a going concern basis. The Directors have prepared detailed operating and cash flow forecasts, which cover a period of more than 12 months from the date of approval of these financial statements. These show that the Group has adequate funds for the foreseeable future to meet its liabilities as they fall due.

The Group is financed through two whole business securitisations, the Punch A Securitisation (£1,449 million of gross debt secured against 2,356 pubs) and the Punch B Securitisation (£884 million of gross debt secured against 1,675 pubs), as well as certain cash resources held across the Group. At 17 August 2013, the Group's liquidity position was strong with £329 million of cash resources (of which £77 million was held outside of the securitisation structures, excluding supply company and Employee Benefit Trust cash), compared to loan amortisation due within 1 year of £64 million. The Group is currently in full compliance with the financial covenants contained in its securitisation arrangements.

Whilst the securitisations (which together cover 98% of the Group's pubs) generated underlying profits and positive net cash flow (before debt repayments) in the year, they required financial support through the use of cash resources held outside of the securitisations to maintain compliance with their DSCR (Debt Service Cover Ratio) covenants. Without this support, both securitisations would have breached their respective DSCR covenant levels in the year. Net support from cash resources held outside of the securitisations amounted to £23 million for the year, being £88 million of gross support less £65 million of cash payments from the securitisations to the wider Group during the year.

The ability of the Group's securitisations to continue to comply with their DSCR covenants in the near term is dependent on the continuation of group support, other actions open to management (e.g. the repurchase and cancellation of securitisation debt at a discount, subject to prevailing market conditions and compliance by the Group with its regulatory obligations) or reaching agreement with the relevant stakeholders to amend the terms of the financial covenants.

The Group has continued an extensive process of engagement with a broad range of the Group's stakeholders to consider amendments to the previously announced restructuring proposals to allow each of the securitisations to be restructured in a consensual way, which would allow them to comply with amended financial covenants without the need for ongoing group support.

The Directors of Punch Taverns plc are of the opinion that it is in the best interests of stakeholders to agree to a consensual restructuring of both of the securitisations and the Directors are of the view that a consensual restructuring can be achieved. However, given the differences in their stakeholder profiles, their legal and financial structures and the contractual linkages between them and the wider Group, the optimal restructuring solution may differ for each securitisation and it may be that no successful restructuring solution can be achieved for either securitisation.

If a consensual restructuring of one or both of the Group's securitisations is not achieved and a covenant breach were to occur in the relevant securitisation then this would be likely to lead to circumstances in which the lenders to that securitisation were able to request early repayment of all outstanding borrowings. Were this to occur, the relevant securitisation would have insufficient cash resources to repay all of its borrowings and would cease to be a going concern, which in turn would result in a significant reduction in the Group's operations. These circumstances represent a material uncertainty that casts significant doubt on the ability of a significant part or substantially all of the Group to continue as a going concern and, in such circumstances, those parts of the Group may be unable to realise their assets and discharge their liabilities in the normal course of business, albeit that the remaining group (and Punch Taverns plc) could continue as a going concern.

2. SEGMENTAL ANALYSIS

The Punch business consists of a core estate and a non-core estate, each having its own clear strategy. Each of these strategic business units consists of a number of cash generating units (CGUs), which are individual pubs. These CGUs generate their own revenues, which are consolidated to give the Group revenue and as a result, Group revenue is not reliant on one significant customer.

The Chief Operating Decision Maker, represented by the Board, reviews the performance of the core and non-core divisions separately, at an EBITDA level, as included in the internal management reports.

The Group operates solely in the United Kingdom.

1Unallocated underlying operating costs represent corporate overheads that are not allocated down to the divisional performance.

1Unallocated underlying operating costs represent corporate overheads that are not allocated down to the divisional performance.

3. NON-UNDERLYING ITEMS

In order to provide a trend measure of underlying performance, profit is presented excluding items which management consider will distort comparability, either due to their significant non-recurring nature or as a result of specific accounting treatments. Included in the income statement are the following non-underlying items:

1 Represents the goodwill relating to those core pubs disposed of in the period.

2 Represents profit on the purchase of securitised debt together with the write-off of related deferred issue costs.

3 Represents movement in fair value of shares held to settle future share schemes and release of provision for share schemes.

4 Represents movement in fair value of shares held as an investment.

5 Represents the recycling of the hedge reserve relating to the Punch B C1 interest rate swap following its reclassification as ineffective during the financial period, due to the announcement of the capital restructuring proposals on 7 February 2013.

6 Represents the movement in the fair value of interest rate swaps which do not qualify for hedge accounting.

4. TAXATION

The effective rate of tax is different to the full rate of corporation tax. The differences are explained below:

Details of the non-underlying tax credits and charges are included in note 3.

5. EARNINGS PER SHARE

Basic earnings per share is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the year, excluding those held in the employee share trust, which are treated as cancelled.

Diluted earnings per share is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the year (adjusted for the effects of dilutive options).

Reconciliations of the earnings and weighted average number of shares are set out below:

The impact of dilutive ordinary shares is to increase weighted average shares by nil (August 2012: nil) for employee share options.

6. NET DEBT

(a) Analysis of net debt

(b) Analysis of changes in net debt

Net debt incorporates the Group's borrowings, cash-backed borrowings, derivative financial instruments and obligations under finance leases, less cash and cash equivalents and restricted cash.

Non-cash movements relate to amortisation of deferred issue costs and premium on loan notes and fair value movement in derivative financial instruments and profit on the purchase of securitised debt.

7. OUR KEY RISKS AND UNCERTAINTIES

Market and economic risks

Economic climate

The recent recession and continued uncertain outlook for the UK economy has affected consumer confidence and discretionary spending across both the retail and leisure industries. Delays in economic recovery or further challenges such as further duty increases could affect consumer expenditure, our Partners' businesses and Punch's revenue.

Mitigating actions and controls

· We carry out regular reviews of the impact of economic conditions on our budget and strategic plans.

· We provided circa £0.5m per period to support our Partners during the difficult conditions last year resulting in 96% of our core estate pubs now being on a substantive agreement.

· We continue to monitor the financial health of our Partners via a Partner Support Tool, together with analysis to highlight potential failures, and the Partnership Development Manager roles have helped grow and diversify our Partners' businesses.

Property valuations

Fluctuations in the UK property market as well as the current uncertain market conditions could impact the value of Punch's property portfolio and our ability to dispose of pubs at an appropriate value.

Mitigating actions and controls

· We have conducted full estate reviews and regularly update these to allow us to assess the future strategy for pubs within the estate.

· This has allowed us to invest where appropriate; consider possible alternative use; or dispose of those which no longer fit our future strategy.

· We invested £58m on developing and improving the quality of our estate during the year.

· We carry out an annual review for any indicators of impairment.

Increasing costs

Increases in any of our key supply costs due to availability of products, the economic climate or inflationary price increases is an ongoing risk to our business.

Mitigating actions and controls

· We continue to negotiate supplier contracts to protect us against significant increases in drink costs.

· Careful cost control processes ensure that costs are budgeted, closely monitored and subject to appropriate authorisation.

Financial

Liquidity risk

Punch's capital structure is made up of debt, issued share capital and reserves.

Punch is financed through two whole business securitisations, the Punch A Securitisation (£1,449 million of gross debt) and the Punch B Securitisation (£884 million of gross debt), as well as certain cash resources held across the Group. As at the year end, the Group held £329 million of cash resources, of which £77 million was held outside the securitisation structures (excluding the cash held by the Group's drinks supply company and Employee Benefit Trust).

The key short-term liquidity risk is the requirement to meet scheduled debt service costs as they fall due. Approximately 80% (August 2012: 83%) of the capital balance of the secured loan notes which make up the majority of our financing is repayable after more than five years.

Mitigating actions and controls

· Cash flow forecasts are regularly produced to assist management in identifying liquidity requirements and are stress-tested for possible scenarios.

· Cash balances are invested in short-term deposits such that they are readily available to settle short-term liabilities or fund capital additions.

Financial covenant and refinancing risk

Both of Punch's securitisation structures have a Debt Service Cover Ratio (DSCR) and Net Worth financial covenant.

While there was significant headroom in the two Net Worth financial covenants as at the year end, both securitisations required financial support through the use of cash resources held outside of the securitisations to maintain compliance with their DSCR covenants. Without this support, both securitisations would have breached their respective DSCR covenant levels in the year.

Net support from cash resources held outside of the securitisations amounted to £23 million for the year, being £88 million of gross support less £65 million of cash payments from the securitisations to the wider Group during the year.

The ability of the securitisations to continue to make cash payments to the wider Group and to comply with their DSCR covenants in the near-term is dependent on continuing to receive financial support from the Group, other actions open to management (e.g. the repurchase and cancellation of securitisation debt at a discount, subject to prevailing market conditions and compliance by the Group with its regulatory obligations) or agreeing with the relevant securitisation stakeholders to amend the terms of the DSCR covenants.

If a DSCR covenant breach were to occur in either securitisation, this would be likely to lead to circumstances in which the relevant securitisation's lenders were able to request early repayment of all outstanding borrowings. Were this to occur, the relevant securitisation would have insufficient cash resources to repay all of its borrowings.

Mitigating actions and controls

· Covenants are closely monitored and stress-tested to ensure that the Group is able to generate sufficient returns to service its debt and meet its covenant requirements.

· A Group support mechanism has been in place throughout the year, whereby cash resources held outside of the securitisations have been used to lower the cost of drinks purchased by the two securitisations to maintain compliance with their DSCR covenants.

· Additional options available to the Group to improve the securitisations' DSCR covenant performance could include the repurchase and cancellation of securitisation debt at a discount (subject to prevailing market conditions and compliance by the Group with its regulatory obligations).

· The Group is continuing an extensive process of engagement with a broad range of the Group's stakeholders to consider amendments to allow each of the securitisations to be restructured in a consensual way, which would allow them to comply with revised financial covenants without the need for ongoing Group support.

· The Board is of the opinion that it is in the best interests of stakeholders to agree to a consensual restructuring of each of the securitisations and is of the view that a consensual restructuring can be achieved.

· The Board expects a consensual restructuring to be launched in the fourth quarter of the 2013 calendar year.

Interest rate risk

Punch is exposed to interest rate risk from loan notes and borrows at both fixed and floating rates of interest.

The use of fixed rate borrowings and derivative financial instruments exposes Punch to fair value interest rate risk such that Punch would not benefit from falls in interest rates and would be exposed to unplanned costs, such as breakage costs, should debt or derivative financial instruments be restructured or repaid early. As at the year end, the fair value liability of interest swap agreements was £254m.

Mitigating actions and controls

· Punch employs derivative financial instruments such as interest rate swaps to generate the desired interest rate profile.

· Punch has taken out derivative financial instruments such that 100% of all external debt (August 2012: 100%) was either at fixed rates or was converted to fixed rates as a result of swap arrangements, reducing our exposure to changes in interest rates

· Future debt requirements are closely monitored to assist management in identifying the appropriate strategy for interest rate hedge arrangements.

Pensions

Punch has a defined benefit pension scheme which must be funded to meet required benefit payments. The value and funding of the scheme is subject to risk of changes in life expectancy, actual and expected price inflation, changes in bond yields and future salary increases. The difference in value between scheme assets and scheme liabilities may vary resulting in an increased deficit being recognised on our balance sheet.

Mitigating actions and controls

· The defined benefit pension scheme is closed to new members; instead we operate defined contribution schemes for our employees.

· We maintain a close relationship with the trustees of the pension scheme.

Internal financial control

Punch is committed to maintaining a robust internal control environment. A lack of control could result in financial fraud or material error in our financial statements.

Mitigating actions and controls

· Robust internal controls operate over all key processes including general controls such as segregation of duties and authorisation of contracts and expenditure.

· The Internal Audit function reviews and reports on strengths and weaknesses in the internal control environment.

Operational and People

Change Management

Punch is reliant on the successful implementation of change programmes to deliver both day-to-day operational improvements and our strategic plan.

Mitigating actions and controls

· Formal project management processes are used across the business to prepare project objectives and plans and to ensure progress is tracked and results measured.

· Major projects are well communicated across the business so that a joined up approach is maintained.

Information systems, technology and security

Punch is reliant upon information systems and technology for many aspects of its business, which could cause damage if they were to fail for any length of time.

Mitigating actions and controls

· An incident management and business continuity plan is in place for critical business processes to ensure the business is able to continue operating in the event of a major incident.

· We have an off-site disaster recovery facility if access to our support centre, or its systems, is affected.

Product quality

Punch is exposed to product quality risk in relation to drink which is supplied to us and sold on to our Partners.

Mitigating actions and controls

· Safety measures are in place to ensure that product integrity is maintained and that drink products are fully traceable.

· Our incident management plan is designed so that products can be recalled quickly if required.

Supply chain management

Punch places reliance on our key suppliers and distributors to ensure continuous supply of drink and other products into our pubs. Punch is exposed to the risk of interruption or failure of suppliers or distributors, resulting in our products not being delivered on time or to our required standards.

Mitigating actions and controls

· Punch has reviewed the disaster recovery and business continuity plans of our key distributors.

· We monitor product quality closely and consider action which may be required to provide substitute products or suppliers if required.

People risks

Failure to recruit, train and successfully retain successful partners, and high calibre employees for our support teams may impact the ability to deliver our business plan and operational objectives.

Mitigating actions and controls

· We provide industry leading induction training and coaching programmes for our new Partners.

· We have improved our succession planning at all levels to ensure we attract and retain high calibre people.

· We carry out an annual Employee Engagement Survey and regular listening groups to obtain direct feedback from our employees.

· We have a remuneration strategy to ensure our teams are paid fairly and competitively.

Regulatory

Health and safety

A health and safety accident or incident could lead to serious illness, injury or even loss of life to one of our Partners, employees or visitors, or significantly impact Punch's reputation.

Mitigating actions and controls

· A health and safety management committee meets to consider all aspects of health and safety across Punch and to report to the Board of Directors on the status of health and safety.

· We have formally documented and briefed health and safety policies for our support centre and field-based teams and carry out annual risk assessments in key areas.

Changes in legislation

Punch is subject to many different areas of regulation, mainly due to the high level of control over the sale of alcohol. Increasing focus in areas such as binge drinking, underage drinking, and health impacts over recent years also means that the Government may introduce further regulation which may significantly affect our business.

Mitigating actions and controls

· Punch works closely with our Partners and the rest of the industry to address the key issues facing the pub sector.

· We ensure that our training covers all aspects of licensing requirements and have due diligence in place to confirm that our pubs meet relevant licensing legislation.

· Punch works closely with local Licensing Authorities, to ensure individual pub licensing requirements are met and any issues are highlighted as soon as possible.

· Punch's Code of Practice exceeds the requirements of the Pub Industry Framework Code (Version March 2013), with the 5th edition being accredited by the British Institute of Innkeeping in June 2013. Any amendments to the Code of Practice will be in line with the Pub Industry Framework Code and will not fall below those standards. The Punch Code of Practice clearly sets out the promises we make and exactly how we intend to honour them.