A zombie well before the pandemic, the UK company had racked up huge debts to finance rapid growth in a sector that had started shrinking some time ago.
By Nick Corbishley, for WOLF STREET:
Intu Properties, which owns 17 malls in the UK, including nine of the 20 biggest, and partially owns three in Spain, has fallen into administration, a form of bankruptcy under UK law, after talks with its myriad creditors collapsed on Friday afternoon. Worth £13 billion at its peak over a decade ago, Intu is Britain’s biggest corporate casualty of the virus crisis so far, though its problems predated Covid’s arrival. Its demise leaves 132,000 jobs, both at the company and in the thousands of stores it hosts at its malls, on the line, as well as some £4.5 billion of debt.
Intu had until 11:59 p.m. Friday night to convince seven of its lenders to accept yet more covenant waivers on £600 million of loans. But those lenders refused to be swayed. They knew that Intu, which had only managed to collect 10% of its second-quarter rents by the due date, according to sources cited by The London Evening Standard, would never be able to repay the debt it owed.
This year alone, the company had £190 million of debt maturing and £93 million of swaps payable, compared to £168 million of cash and £129 million of other available funding facilities. Things would get particularly hairy thereafter, with £920 million of debt coming due in 2021, followed by £780 million in 2022, £1.03 billion in 2023 and £670 million in 2024.
Mid-morning Friday, Intu reported that “insufficient alignment and agreement [had] been achieved on such terms.” Hours later, it announced it had appointed three administrators at KPMG.
Before that, the company’s shares nose-dived in a near-perfect straight line from almost worthless (four pence a piece) to nearly totally worthless (just over one pence a piece). In early afternoon, the Financial Conduct Authority decided to suspend the listing the shares. Shortly after, the London Stock Exchange suspended the trading of those shares, at which point the company’s market value was just £24 million.
“The significance of Intu’s collapse “cannot be understated,” said Richard Lim, chief executive of Retail Economics. The coronavirus lockdown is speeding up a trend towards buying more consumer goods online, he said. “It’s going to be a really, really tough challenge. There’s no getting away from the fact we have too much retail space.”
And many of the occupants of that retail space are no longer paying their rents. Commercial landlords in the UK received just 18% of what they were owed by their last quarterly rent collection date (June 24), according to data collected by Re-Leased, the cloud-based commercial property management platform. That’s even lower than the 24% collected by the March quarterly rent day, laying bare the growing pains being felt by commercial real estate tenants, particularly the non-essential retailers that were forced to close between March 23 and June 15.
Their loss has been e-commerce’s gain. After years of gradual incremental growth, online spending surged to new highs during lockdown. By May, online sales accounted for 33.4% of retail spending in the UK (unlike US retail figures, this measure does not include motor vehicles and pharmaceutical products), compared with 19.6% in February, according to the Office for National Statistics.
“In many ways, the pandemic is an accelerator, and will really have forced change that would have taken five years or more to happen now,” retail analyst Mr Hyman told BBC News.
The UK’s brick-and-mortar retail meltdown was already well under way before Covid’s arrival, as a toxic cocktail of factors — high rents, high business taxes, low profitability, online competition, low consumer confidence and spending power, among others — took its toll on both the high street and the mall. A total of 117,000 retail jobs were lost and 14,500 stores were closed in 2019 alone as a result of brick-and-mortar retail companies hitting the wall or simply cutting costs in a desperate bid to stay afloat, according to a report published by the Centre for Retail Research.
The impact of wave after wave of store closures on the financial health of Intu — which had racked up huge debts to finance rapid growth in a sector that had started shrinking some time ago — was too much to bear. In 2019, it registered losses of £2 billion as many of its tenants either shut stores or ceased trading altogether. The value of its property assets had fallen 33% in little over two years. Its only chance of staving off bankruptcy was to raise new funds. It needed at least £1.3 billion.
It had only two ways of raising that much money: One, selling off its most valuable UK properties, but demand for malls was not exactly strong. In 2019, shopping center transactions hit their lowest level since 1993. Or two, raising fresh capital from investors. But this was an impossible task, given its shares had already collapsed to almost zero and the sector it was in — brick-and-mortar retail — was in the deepest depression and had the bleakest prognoses.
Now, the company is in administration. Its 2,500 employees, some of whom were furloughed during the lockdown, face a deeply uncertain future, So, too, do the 130,000 people who work in the thousands of shops housed in Intu’s malls. Intu insists that the underlying group operating companies remain unaffected and all shopping centers will continue to trade. But those decisions will no longer be up to Intu.
The new owners of Intu’s assets are Intu’s creditors — mainly its banks — and they will want KPMG to sell off those assets as quickly as possible. And in a market that has essentially stopped moving, that can only mean one thing: bargain basement prices of those properties, which will further depress asset values in the sector. And that is the last thing other large retail property owners such as Hammerson and Landsec, which face similar problems to Intu — including non-paying tenants, plunging asset values and rising losses — need right now. By Nick Corbishley, for WOLF STREET.
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