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UK retail landlord Intu's survival in balance as creditors weigh debt plan

Intu Properties PLC's days as one of the U.K.'s largest owners of retail real estate may be numbered. The company, whose share price has fallen from more than £3.50 per share in 2015 to below 5 pence in recent weeks, has warned it could fall into administration if it fails to agree a debt standstill with its creditors.

Following its breach of debt covenants, Intu is in negotiations with creditors to decide its fate, which are set to come to a head today, June 26, when the deadline for Intu's revolving credit facility covenant waiver is reached.

Points being considered include the duration of the debt standstill, the extent and basis to which creditors at the individual asset level will share in any future valuation recovery, and how the operations of the shopping centers are to be funded.

Colm Lauder, real estate equity analyst at stockbroker Goodbody, said in an interview that the decision could go either way, but that it is not in the interests of Intu's creditors to force the company's collapse. "We're in a market that is frozen," he said. "So you can't really come in and liquidate Intu's assets because there's no functioning market out there. No one's going to buy them and selling them in a highly distressed market is probably not in their best interests."

Taking over management of Intu's assets and hoping to collect rent from tenants to recoup their investment is also undesirable for creditors in the current climate, Lauder added. Existing landlords are probably best placed to negotiate with tenants, so there is a lot of common interest in Intu continuing to operate the centers, even if the administrator is appointed, he said.

Intu has appointed KPMG as an administrator in case a debt standstill fails to be agreed. If an agreement is not reached, all property companies of Intu would be required to pre-fund the administrator to provide central services to the shopping centers, it said. Intu added that there is a risk the retail properties may have to close for a period if the administrator is not pre-funded.

Steady decline

Intu's fortunes have suffered a steady decline in recent years as the U.K. retail sector struggled with the rapid growth of e-commerce, tepid consumer spending growth, and fierce competition. Rents eroded as a strengthening flow of tenants entered insolvency procedures, leading to widespread store closures and demands from competitors for rental parity. The value of retail property has plummeted accordingly.

The impact of the COVID-19 pandemic has accelerated the trend. The health crisis forced the closure of all no-essential retail in the U.K., obliterating retailers' income and their ability to pay rent.

If Intu manages to secure the debt standstill from its creditors, its only hope of survival is to off-load much of its portfolio, said Lauder. "They'd have to initiate large, wide-scale disposals, hoping that the market has some liquidity in the coming months," he said. "And then pay down some of their tighter debt covenants quickly and try to get the business on a relatively stable debt footing."

In a note accompanying Intu's full-year earnings statement in March, auditors warned that Intu might struggle to keep operating because of high debts and falling asset values. The value of malls and stores owned by Intu fell by £2 billion by the end of 2019 to £6.6 billion, down 33% from their 2017 valuation. Intu's loan-to-value rose to 67.8% following the revaluation.

Intu has been the subject of three failed takeover bids since 2017. U.K. peer Hammerson PLC mounted a £3.4 billion bid for the company in 2017 before pulling out months later after pressure from worried shareholders. A Brookfield-led consortium also backed out of a deal in November 2018 after a £2.89 billion offer for the company was considered. Private equity firm Orion Capital Managers L.P., one of Intu's largest shareholders, was reported to be keen on taking over Intu in 2019, but nothing came of its search for an investment partner.