INTU – The downfall of debt

Unless you’ve been living under a rock recently then you’ll be aware of the problems facing INTU; a giant retail landlord which is facing a catastrophic collapse in the face of declining revenues and a mountain of debt. As a landlord, INTU has been in the business of buying and developing giant shopping centres. These shopping centres are split into ‘units’ of different sizes and then rented out by retailers and restaurateurs who pay INTU rent. As we all know though, bricks and mortar stores have been a declining revenue stream since 2007; we’ve had a huge swathe of the British retail industry go bankrupt since then and the ones that are left behind are generally facing a tough time.

To build and run their property portfolio, INTU borrowed funds – some from investors (equity) and some from lenders (debt). The debt element (valued at around £4.5bn in 2019) is causing the trouble as in addition to being secured against the assets of the company it also comes with fairly strict terms and conditions under which INTU faces penalties. One of the most important of these has been the ‘debt to asset’ covenants, under which lenders are entitled to appoint property managers, sell off assets or even withdraw credit from the company when the amount of money loaned to INTU gets to a certain percentage of assets (I read that these covenants started coming into effect when debt hits 70% of an assets value but I suspect these are different depending on the asset and lender).

How has this happened?

As fewer and fewer people show in bricks and mortar stores, individual retailers have either moved out to cheaper premises, moved online or gone bankrupt. As a result INTU has faced declining footfalls and rents in most of its stores. Retail property is primarily valued by its ability to generate rental income and so their independent valuation expert (CBRE) has gradually written down the value of the retail centres over time. As these values have fallen, INTU has had two choices – either pay down debt to keep the ‘debt to asset’ ratio within the approved levels or hold on and hope that values go back up.

Within declining rental income however, paying off this debt has been harder and harder to do at a sufficient rate – especially when you have renovation, management, and dividend costs to pay. The company has taken steps to reduce these, but the values of the shopping centres has declined even faster.

To raise more cash and pay down debt, INTU announced an equity raise in 2019 but this was later withdrawn due to a lack of interest from investors. The company also scrapped their dividend (if I were an investor in the company, I would likely have sold my position at this point – fortunately, I was not).

What next?

The company share price has declined from an all-time high of £9.27 in 2006 to just 4p per share in 2020. Unless the company can raise cash it seems highly likely that it will crash into administration leaving shopping centres across the UK with emergency landlords as the company goes through administration. It could be that smaller investors are willing to buy individual assets or perhaps some businesses will be willing to buy to their premises from the administrator but if the company does enter administration it will be a huge blow for investors in the firm.

The acquisitive side of my investing nature is looking at the company and thinking ‘surely there is value here?’. With shares priced at 4p, assets on the books would have to be written down by more than 98% to generate a loss for shareholders. This comes with a huge caveat however and that is the relationship equity owners will have to creditors. I am not a bankruptcy expert (or even a novice). I have little understanding of the company’s assets or lenders and suspect that in the event of bankruptcy equity owners would be wiped out – even at today’s pathetically low share price. Debtors would likely be entitled to assume ownership of the shopping centres against which they have lent money and what would equity owners be left with? A big fat nothing. The company would have a huge stack of debt and no assets; it would be worth 0p a share at best.

The only real hope for investors that currently hold the business is that lenders can be convinced to postpone seizure of the assets and provide INTU time to affect a transition towards developing and selling off assets in a more profitable manner. There is no guarantee that this will be the case and for this reason, I am steering well clear of what looks to be 2020’s first corporate car crash.

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