Shopping centre owner intu has begun searching for £750m of fresh debt that will be secured against its prize asset, the Trafford Centre in Manchester.
It has approached lenders in order to put together a club of financiers that would see an expensive historic CMBS structure refinanced and its cost of debt brought down.
The 2m sq ft centre is one of the largest in the UK and is valued at £2.1bn. It currently has just over £1bn of debt secured against it, reflecting a 49% loan-to-value ratio.
This is made up of around £750m of CMBS, senior debt that sits at an LTV of close to 36% and a further £250m junior loan from Canada Pension Plan Investment Board which was issued in 2017 and is expected to remain in place.
The CMBS loan is not distressed and the company is taking a proactive approach to trimming its costs. The CMBS has an LTV covenant of 65%, although this does not come into play if interest payments are made, as they continue to be.
Intu has only £127m of debt maturing across 2019 and 2020, although this spikes in 2021 when £1.2bn becomes due, with a further £775m due in 2022 and £1bn in 2023.
Despite the pressure on the retail sector and the company the process is understood to be gaining strong interest from lenders due to the exceptional quality of the asset.
The debt held against the Trafford Centre incurs an interest rate of 6%, compared to intu’s weighted average cost of gross debt of 4.2%, and the company is aiming to reduce the cost of finance against the mall to around 3.5%. It is expected that the quantum of debt held against Trafford, and subsequently the LTV ratio, will remain the same.
The CMBS debt amortises down in chunks, meaning that as it stands intu may have to look to sell assets when major repayments are due, albeit the biggest payments are not due until towards the end of the structure’s life in the mid 2030s.
However, the equation is far from straightforward. The company would have to pay an early repayment penalty to bondholders if it were to complete a refinancing. Intu will have to consider the impact of this payment and balance it against the prospective saving it may make by putting a new facility in place.
Intu inherited the CMBS structure when it bought the Trafford Centre from John Whittaker’s Peel Group, in exchange for £1.6bn of shares, representing 23% of the company.
It forms part of the £4.9bn of outstanding loans that the company has in place. Following a 13.3% fall in the value of its assets during 2018 to £9.2bn, intu’s loan-to-value now stands at 53.1%. It intends to bring this back down to below 50% through asset sales, including its Spanish portfolio, Sprucefield Park in Northern Ireland and intu Derby, (see below).
Derby deal gets creative
Meanwhile, intu is understood to be putting in place a complex, highly-structured financial arrangement with Cale Street Partners in order to offload a 50% stake in intu Derby and help reduce the company’s loan-to-value ratio.
While the proposed deal for a half-share, which according to the company’s latest valuation would be worth £186.3m, will be registered as the sale of an equity stake on the company’s balance sheet, it will be undertaken using a “debt-like” instrument.
Kuwait Investment Authority-backed debt specialist Cale Street, led by former Goldman Sachs executives Roman Camina-Mendizabal and Ed Siskind, will have a limited exposure to any fall in the value of the asset, which would primarily be taken on by intu. Conversely, Cale Street would have a limited share of any upside.
It is also likely that the structure would be an arrangement with a limited timeframe, much like the term of a loan.
Last week when reporting its financial results, chief executive David Fischel told EG that given the relative weakness of the current investment market for shopping centres the company would have to take a more creative approach to disposals: “In a very buoyant market, disposals will be completely clean, but – you see this in the investment market generally – when things are more difficult, people look for more rental and rent-free guarantees.”
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