latest-news-headlines Market Intelligence /marketintelligence/en/news-insights/latest-news-headlines/49825316 content
BY CONTINUING TO USE THIS SITE, YOU ARE AGREEING TO OUR USE OF COOKIES. REVIEW OUR
PRIVACY & COOKIE NOTICE
Log in to other products

Login to Market Intelligence Platform

 /


Looking for more?

Contact Us

Request a Demo

You're one step closer to unlocking our suite of comprehensive and robust tools.

Fill out the form so we can connect you to the right person.

  • First Name*
  • Last Name*
  • Business Email *
  • Phone *
  • Company Name *
  • City *

* Required

In this list

HMV store closures throw spotlight on shopping center rents, Intu

Credit Analytics Case Study Poundworld Retail Ltd

Segment

IFRS 9 Impairment How It Impacts Your Corporation And How We Can Help

The Market Intelligence Platform

Real Estate

Real Estate Solutions Overview


HMV store closures throw spotlight on shopping center rents, Intu

Canada's Sunrise Records has swooped in to rescue U.K. music store chain HMV Group PLC from insolvency, a move that will keep 100 of the chain's 127 stores open. While it is a rare case of good news for the U.K.'s beleaguered retail sector, it nonetheless throws an unwelcome light on how retail landlords price rents in shopping centers.

A surprising number of the closures will occur at some of the country's largest prime shopping centers, stores that are likely to have been among HMV's best revenue generators, according to retail analyst and consultant Nick Bubb. Sunrise Records' decision that it could not make these stores viable suggests that the rents set by the landlords at these shopping centers were an issue, Bubb said in a Feb. 6 note.

Independent retail consultant Richard Hyman, who has advised some of the U.K.'s largest retailers and retail landlords, said in an interview that the traditional way retail landlords set rents no longer works.

SNL Image
Intu's Victoria Centre in Nottingham, U.K., is among the
locations at which HMV will keep its store open.
Source: Intu Properties

"Having a system that's evidence-based is just not economically viable," he said. "It leads to all sorts of jiggery-pokery. If you can find someone stupid enough to pay a high rent, that sets the rent for the rest of the center without reference to what business you're going to do in that space. That's ridiculous. That doesn't work anymore."

Retail rent levels have become a particular point of friction between landlords and tenants as U.K. retailers face growing competition from e-commerce, low consumer spending growth and economic uncertainty surrounding Brexit. Retail tycoon Mike Ashley vowed in November to shut all 15 of his stores at Intu shopping centers after a dispute about new rent terms for four House of Fraser outlets, a brand he rescued from insolvency in August, according to the (U.K.) Times.

The shopping center model means landlords are particularly prone to setting rent levels that retailers might struggle to make viable, said Hyman. "A shopping center is a sort of purist form of retail landlord because it's one landlord in one location. Major shopping locations that aren't in purpose-built shopping centers usually involve lots of different landlords [that compete for tenants and set different rents]," he said.

"Most of these landlords are going to have to change the way that they do business completely because there's a complete disconnect between the rental levels and the sort of business that you can do at these spaces," he added.

Intu Properties PLC, which has faced a string of bad news over the past year, is the biggest loser among U.K. real estate investment trusts with exposure to HMV. Seven of the 27 stores closing are at Intu-owned properties and represent 0.2% of Intu's rent roll, the company told S&P Global Market Intelligence in an emailed statement. Another eight HMV stores at Intu properties will remain open.

SNL Image


Credit Analysis
Credit Analytics Case Study Poundworld Retail Ltd

Highlights

Co-written by Elijah Harden, Risk Services

Aug. 29 2018 — Bankruptcy Summary

Poundworld Retail Ltd (Poundworld) is a discount store operator located in the United Kingdom that on June 11, 2018, while operating around 350 stores, filed for administration in order to work to find a buyer for the chain1. S&P Global Market Intelligence’s Fundamental Probability of Default (Fundamental PD) increased nearly fivefold from 1.69% (an implied credit score of ‘bb-’2), a level that was better than the median general merchandise store in the U.K., to 10.39% (an implied credit score of ‘ccc+’) between fiscal year (FY) 2015 and FY 2016. To summarize, the increased Fundamental PD is similar to a credit score decline from ‘bb-’ to ‘ccc+’. The following year between FY 2016 and FY 2017, the Fundamental PD increased nearly 72% from 10.39% to 17.84% (an implied credit score of ‘ccc-’).

As of the reporting date November 10, 2016 for the period ending March 31, 2016, 19 months before the company filed for bankruptcy, Poundworld fell into ‘ccc’ range and was unable to recover. Poundworld’s inability to recover was due to competing in an increasingly competitive discount retail environment where there was less foot traffic to traditionally populous town centers and exchange rate pressure due to importing goods while the pound was weaker than the dollar3. This resulted in increasingly narrow margins, higher leverage, and decreasing profitability.

Exhibit 1: Fundamental PD Escalation

Business Description

Poundworld operates a chain of discount department stores in the United Kingdom and sells products through its online shop. It offers food and drinks, cleaning and laundry products, health and beauty products, home products, garden and outdoor supplies, pet care products, electrical products, stationery items, toys, baby products, party and gift products, and leisure time products. Poundworld was founded in 1974 and is based in Normanton, United Kingdom.

Fundamental Probability of Default Analysis

The analysis of S&P Global Market Intelligence’s one-year Fundamental PD reveals Poundworld had consistent implied credit scores in the ‘single b’ range for 10 of its 13 reporting periods from FY 2005 to FY 20174. In the time after FY 2012 the volatility of the implied credit scores increased in response to the volatility of Poundworld’s net income. As recently as FY2015, Poundworld, with a PD of 1.69% (implied credit score of ‘bb-‘), sat in the top half of UK general merchandise stores. However, in FY 2016 the company fell into the worst 25% of its UK peers with a PD of 10.39% (implied credit score of ‘ccc+’), roughly a year and a half before filing for administration. Subsequently, in FY 2017, it approached the worst 10% of its UK peers with a PD of 17.84% (implied credit score of ‘ccc’). This shows a notable escalation in risk, both on an absolute basis and with respect to its peers.

The Fundamental PD as of August 16, 2017 for the reporting period ended March 31, 2017 (FY 2017) highlights business and financial risk were significant problems for the company with vulnerable and highly leveraged scores, respectively. The most noteworthy factors contributing to the increased PD were total revenue, profit margin (net income to total revenue), a ratio of how much of every dollar earned is kept within the company, and current liabilities to net worth, a measure of how leveraged the company is/how much debt is used to finance the business. Poundworld experienced a revenue growth rate decline of 57.15% between FY 2015 and FY 2016 from 22.32% to 9.56% with a subsequent decline of 40.88% ultimately ending with a profit margin of 5.65% by FY 2017. As revenue growth for Poundworld slowed, the company became exceedingly leveraged. The average current liability to net worth ratio between FY 2013 and FY 2017 was an extraordinary 667%, signaling the company was unable to pay off debt obligations that were due within a year. In addition to the increasing leverage, Poundworld was battling diminishing profit margins until they eventually became negative, with an average profit margin of -0.02% between FY 2013 and FY 2017. Poundworld’s illiquid position made the company particularly vulnerable to the other operating expenses which totaled approximately £9MM in FY 2016 and FY 2017, which only carried the company closer to the brink of bankruptcy.

Source: S&P Global Market Intelligence as of July 19, 2018. For illustrative purposes only.
Note: Current Liabilities to Net Worth ratio in FY 2017 is actually -1317%, but the model assumes the worst possible profile and assigns the value of 10842%

Source: S&P Global Market Intelligence as of July 19, 2018. For illustrative purposes only.

1 Unless otherwise noted, all information sourced from the S&P Capital IQ platform as of July 24, 2018.
2 S&P Global Ratings does not contribute to or participate in the creation of credit scores generated by S&P Global Market Intelligence. Lowercase nomenclature is used to differentiate S&P Global Market Intelligence PD scores from the credit ratings used by S&P Global Ratings.
3 Source: Financial Times, Poundworld files for bankruptcy, as published on June 11, 2018. https://www.ft.com/content/5f00154e-6d54-11e8-852d-d8b934ff5ffa
4 Source: S&P Capital IQ platform as of July 24, 2018.

Learn more about Market Intelligence
Request Demo

Credit Analytics Case Study The Bon-Ton Stores, Inc

Learn More

Credit Analytics Case Study: Carillion Plc

Learn More

Credit Analysis
IFRS 9 Impairment How It Impacts Your Corporation And How We Can Help

IFRS 9 is a reporting standard for financial instruments that replaces IAS39 (the previous incurred loss standard) with the introduction of provisions for expected credit losses (ECLs) on all financial assets, such as those held to collect contractual cash flows, or held with the possibility of being sold.

The date for adoption was January 1, 2018 and is mandatory for public non-financial corporations (and financial institutions) across a number of jurisdictions outside the United States, including many European countries.

The two key changes introduced by the IFRS 9 accounting standard are:

  • Calculation and provisions must be performed on all affected financial assets, not just the impaired ones, as per the standard it replaces
  • New expected credit loss calculations

Additional challenges will be presented when making assessments for low default asset classes, and companies may find it difficult to access models and sufficient data history.

Impact for non-financial corporations

Non-financial corporations will have some material exposure to many of the financial assets that are defined under IFRS 9. These include investment portfolios, intercompany loans, lease receivables, contract assets, and trade receivables, as illustrated below and further explained in our webinar on IFRS 9 for non-financial corporates.

This, together with the need to assess losses on performing and non-performing assets, might have a material impact on the profit and loss (P&L) of such companies.

ECL calculations under IFRS 9

The IFRS 9 accounting standard introduces new expected credit loss (ECL) calculations that require more data and new models. The key requirements are:

  • Significant increase in credit risk (SICR): Expected loss needs to be assessed at each reporting period to identify a SICR since initial recognition
  • Explicit macro-economic forecasts need to be considered using factors such as the relevant GDP growth, unemployment rate, and stock market index growth figures
  • Credit risk metrics such as probability of default (PD), credit rating, credit score, and loss given default (LGD) need to be adjusted to point in time (PiT), versus through the cycle (TTC)
  • Calculations need to be extended over the lifetime of the assets for underperforming exposures, or in standardized calculations

General versus simplified approach

When performing ECL calculations for trade receivables, the company can choose to take a general or simplified approach (the company is presented with a choice between the two depending on the type of exposure).

  • The general approach uses the 12-month ECL calculation for performing assets (Stage 1 assets) and lifetime calculation for the assets whose creditworthiness has deteriorated since recognition (Stage 2 assets)
  • The simplified approach uses the lifetime ECL calculation for all performing and non-performing assets

The simplified approach can have a bigger impact on P&L expense, as all losses are calculated over the lifetime of the asset, while the general approach can have more impact on P&L volatility, as assets might move between stages incurring 12-month and lifetime calculations.

How S&P Global Market Intelligence can help

A best practice approach used by many financial institutions, which non-financial corporations can also use to comply with the new provision, is to use the existing TTC metrics and convert them into PiT metrics to reflect the current credit cycle, as well as include the required future macroeconomic considerations.

S&P Global Market Intelligence has developed models and tools to help your business undertake the relevant ECL calculations. These models can also be used to assess the creditworthiness of your counterparties and recovery of your exposure in the context of your core business process such as customer credit, supply chain risk, vendor management, and selection and transfer pricing.

The calculation method involves four steps:

  1. We calculate the TTC metric, i.e. the S&P Global Market Intelligence Fundamental PD, CreditModel™ score, for the concerned entity.
  2. We apply our macro-economic model, which weights user defined macro-economic scenarios to produce weighted average forecasted PDs.
  3. We apply a credit cycle adjustment, which converts the TTC risk metric into a PiT PD, leveraging the difference between observed default rates from S&P Global Ratings’ rated universe over last year versus over the past 30+ years.
  4. In addition, as a best practice, we also offer the option to incorporate market-based forward looking information. This is done by further adjusting the PD with the analysis of PD Market Signals country and industry benchmark trends over the past three months versus the past year.

In addition to this quantitative approach available on the Credit Analytics platform, we also offer scorecards that cover low default asset classes for PD, LGD, and point in time adjustments.

Learn More About Credit Analysis
Request a demo

Watch: The Market Intelligence Platform

Highlights

Expressly designed with your workflow in mind.

The new Market Intelligence platform puts a world of information at your fingertips, allowing you to make strategic business decisions with conviction, speed, and laser-focused insight. Essential information you need, when you need it. That’s the power of Market Intelligence.

Learn more about the Market Intelligence Platform.


Watch: Real Estate Solutions Overview