Intu, the shopping centre-centric REIT, is on the verge of falling into administration after a last gasp attempt to reach agreement on a temporary pause to debt obligations failed today. The company announced earlier in the week that it had lined up KPMG as administrators if talks failed. With that now a reality, the next step is to officially appoint the administrators.
Intu employs around 2500 staff directly, the jobs of all of whom are now at risk. At least some of the 17 shopping centres the REIT owns across the UK, including Manchester’s Trafford Centre, the Metrocentre in Gateshead and Lakeside in Essex, may be forced to close.
The past week has seen Intu engaged in make or break discussions between its advisors and creditors including Barclays, HSBC and UBS. A standstill agreement that would have given the REIT several months reprieve from debt repayments, hopefully enough time to steady the ship, was reportedly close to being reached. However, in the end, a group of lenders including the Canadian pension fund The Public Sector Pension Investment Board, refused to agree to the terms.
News this morning that talks had failed ahead of today’s deadline saw the Intu share price drop by over 50% during morning trading. Shares that were worth over £3.50 each less than 5 years ago are currently trading for less than 2p.
The Public Sector Pension Investment Board, which manages the savings of Canadian civil servants and armed forces, had loaned into £250 million against the Trafford Centre, considered the most attractive of the shopping centre properties in Intu’s portfolio. Lenders will take control of Intu’s assets if it enters administration.
Buyers are said to already be circling the jewels in crown, with British Land reportedly in talks with lenders over taking over the asset management of the Trafford Centre.
Intu’s problems go back a few years now, over which time it had built up pre-Covid-19 debts of £4.5 billion to plug the shortfall in rental payments from retailer tenants of its shopping centres. Many were falling short on making rental payments as the bricks-and-mortar retail sector struggled with online competition, rising wage costs and business rates.
The coronavirus pandemic lockdown has accelerated the fundamental weaknesses in the retail sector and only 13.8% of UK retail rents for the second quarter were paid on their due date this Wednesday. With very little income coming in, Intu was itself on course to breach its debt covenants after today’s deadline passed.
A further issue has been the complicated structure of Intu’s debt. Even one lender refusing to agree to a standstill agreement was enough to send the company into administration. £1 billion of the debt is held on a corporate level, rather than held against individual shopping centre properties.
When debt agreements of the REIT’s subsidiary companies in control of individual shopping centres are breached, cash coming into the subsidiary, such as rental revenues, must be kept to improve its loan-to-value ratio. That meant most revenues were no longer able to flow to the parent company, which pays for staff and the services needed to keep shopping centres operating.
Intu was subject to two takeover approaches in 2018, by rival Hammerson and a take-private move by John Whittaker, the REIT’s deputy chairman. His company Peel Holdings is also Intu’s largest shareholder. However, a Canadian investor in Peel, Brookfield, caused the deal to flounder by getting cold feet as a result of what it saw as a worrying outlook for retail property.
Brookfield’s caution is currently proving well-judged.
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