Intu’s cash call failure raises questions about future direction
What about £4.5 billion?
That’s approximately how much shopping centre landlords Intu’s current debt level is and why they sought to raise some more cash from their investors in a call earlier this week.
Sadly for them, they cancelled the call when it became apparent that they’d be unable to reach the amount but once word got out, their share price dropped 41% to 6.3p.
Intu owns nine of the UK’s top 20 shopping centres including the Trafford Centre, Lakeside in Essex and the Metrocentre in Gateshead.
They have sold 50% of their interest in Intu Derby last year to a Kuwaiti-government backed investment vehicle but this weakens the most critical part of a company’s balance sheet which is their debt-to-asset ratio.
Under 40% is considered optimal while Intu’s stood at 68% at the end of 2019.
They also suffered from several large renters entering CVAs such as Debenhams, Arcadia and Monsoon last year which also reduced their income although the full effect of the current coronavirus situation with less footfall entering their properties will take months to filter through the system and be fully realised.
Another critical issue Intu are facing is that they may be close to breaching their banking covenants.
A banking covenant is a condition imposed on the lender by the bank when borrowing a large sum of money. It’s to ensure that the borrower has the wherewithal to service and repay the debt.
While some can be quite general, others may have strict stipulations that a business maintain a certain level of profitability in order to meet the interest payments on the loan.
If a covenant is broken then banks can ask for their money back although given that a company would be in a distressed condition to breach them in the first place, this may be counterproductive. The bank would usually demand penalty interest payments on top of the agreed amount so the business could continue trading while paying off the debt.
Covenants are tested at six monthly intervals with the next test for Intu coming in July. If Intu’s valuations fall by 10% in the first half of 2020 which would happen if the rate of decline through 2019 is maintained, then they would be in breach, which could cause another fall in the value of the company.
Chris Horner, insolvency director with Business Rescue Expert said: ““If the high street cannot be revived into the experience shoppers desire. It’s likely large shopping centres could end up following suit.”
“Next week’s budget will be closely followed as the first big test as to what the government can do for all industries, but with a major focus on the high street and business rates.
“The spread of coronavirus may almost have a significant effect on the high street, with the elderly, who are in the high risk category, potentially being more cautious about going out, when they are also more likely to use a high street store than shop online.”
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