Market Report: Morgan Stanley calls time on Punch Taverns

Punch Taverns closed down more than 15 per cent after it was suggested that a sharp fall in profits and the resulting covenant breaches might trigger a major restructuring that could leave the stock, worth 106.25p last night, trading at 10p.

Switching its stance on the stock to "underweight" with a 195p target price from "equal weight" with a 390p target price, Morgan Stanley said that in its bear case scenario, a 15 per cent decline in profits will cause Punch to breach covenants relating to its Spirit and Punch B securitisation vehicles in the third quarter of 2009 and the first quarter of 2011 respectively. "This would trigger a major restructuring such as a debt-for-equity swap and would leave minimal value in the equity, which we have estimated at 10p," analysts Jamie Rollo, Vaughn Lewis and Audrey Borius said.

In the wider sector, the broker said JD Wetherspoon, down 6.67 per cent, or 20p, at 280p after it was downgraded to "underweight", and Enterprise Inns, down 6.77 per cent, or 4.5p, at 62p, will need to cut or suspend their dividends.

Overall, investor sentiment sank after new data revealed that manufacturing activity in the UK and the US declined at a record pace last month, sparking concern about the depth of the recession on both sides of the Atlantic. The FTSE 100 retreated to 4,065.49, down 5.19 per cent or 222.52 points. The FTSE 250, seen as more reflective of the domestic economic situation, was down 4.32 per cent or 262.93 points at 5,830.39.

David Jones, chief market strategist at IG Index, said the stock market was unlikely to witness anything more than a short-term recovery in the days ahead. "Traders seem to be too willing to jump out of rallies very quickly, ahead of the perceived next major sell-off," he said.

The mining sector was the hardest hit in the sell-off, amid fears of further deterioration in the demand for commodities. Lonmin, the South African platinum producer lodged at the bottom of the Footsie, fared the worst, losing 18.25 per cent or 155.5p to 696.5p. The Anglo-Swiss copper producer Xstrata fell 12.52 per cent, or 116.5p, to 814p, while Fresnillo, the Mexican silver miner, lost 9.02 per cent, or 13.9p, to 140.2p.

Oil and gas issues, including BG at 851.5p, down 7.45 per cent, and BP at 496p, down 5.84 per cent, traded lower after the oil price fell on news that the Opec producers' cartel had deferred a production cut to mid-December after a weekend meeting in Cairo.

Among retailers, Tesco eased back to 288p, down 2.47 per cent. The supermarket group is expected to reveal a slowdown in like-for-like sales growth at its UK operations when it publishes a third-quarter update today.

The high street fashion retail chain Next was down 9.48 per cent at 1,003p as the growing economic malaise led to renewed concern about the state of consumer spending with retailers entering the crucial Christmas season.

On the FTSE 250, PC World-owner DSG International slumped 16.51 per cent to 9.81p, after Société Générale slashed its target price for the stock from 32p to 6p, saying that last week's update "provided no answers regarding the medium-term health of the group, but highlighted the increasing financial pressures".

The broker added: "Given the lack of visibility and uncertainty surrounding DSG's financial position, we believe the equity is effectively 'option' money, as there is no current dividend and no net assets."

Taylor Wimpey was just behind, losing 15.91 per cent at 9.25p after investors moved to bank profits from recent gains. The housebuilder is expected to announce details of a deal with lenders before the year is out. Sector peer Barratt Developments bucked the market trend, gaining 3.78 per cent to 48p on hopes that the Bank of England will cut interest rates again this week.

Among smaller companies, JJB Sports was down 15.38 per cent at 22p, amid concern about recent reports that Barclays had appointed Grant Thornton, the accountant and restructuring specialist, for advice on the company's future business plans. The news overshadowed an announ-cement from JJB that it had assigned four stores to Sportsdirect.comto try to reduce its level of borrowings. Altium Securities said the move should ease some of the financial pressure on the business and reiterated its "buy" stance on the stock.

Elsewhere, Altium reiterated its "sell" stance on New Star Asset Management, the fund manager that lost 42.93 per cent to 7.99p after the UK listing authority decline its request for the suspension while it hammers out a rescue deal with lenders.

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