Now The Hard Work Starts: Inside The £4.5B Insolvency Of Intu

One hundred and one days ago today, shopping centre REIT Intu collapsed into administration under the weight of more than £4.5B in debt. Since then, one of the most complex insolvencies in real estate history has been underway. And now, the really hard part starts.

Lenders to the company now control Intu’s 22 assets, including eight of the 20 biggest shopping centres in the UK. They have appointed new asset managers to try and revive struggling properties, claw back value and possibly find new buyers, a herculean task in the worst retail market in living memory. High profile and under the microscope, the process will be a bellwether for the entire UK retail market. 

What has happened since 26 June, when partners at KPMG were appointed administrators to a company that was once a mainstay in the FTSE 100, but was ultimately unable to persuade its lenders that it could meet its interest payments and come up with a cohesive plan to manage its assets? 

Those involved describe a highly complex and expensive process. It can be hard to remember, but Intu still technically owns all but one of its assets — essentially it is the management company that has gone into administration, not the assets themselves. But the 13 lenders or groups of lenders that provided debt to the 17 assets the company owns have now taken control, and over the summer ran beauty parades to find new asset managers.

With those new managers selected (see map for which companies now oversee which assets), KPMG and Intu have been handling the process of transferring over every element of the management of some of the UK’s largest shopping centres, each one an intricate company in itself. Everything from staff and IT systems to electricity bills and social media accounts is being transferred across to the new managers. It has been a fee bonanza, with KPMG likely to be paid £16M, and £9M in external legal and consultancy fees already spent. 

Some of those asset managers have already completed the takeover of the Intu assets; for others, that will happen in the next few weeks. Those managers will be tasked with increasing occupancy and rent collection rates and forming a strategy for assets in a shopping centre leasing market that was already struggling before the coronavirus pandemic further impacted the ability and willingness of retail and leisure businesses to pay rent. 

Those involved in the process find point to the positives: After a period of drift and uncertainty, there is the possibility of breathing new life into what are among the best shopping centres in the UK. The mission is clear: improve footfall and create sustainable rental streams. And that involves a new dialogue with tenants and centre staff. 

“At the level of the individual centres, there are some fantastic staff, and we’re really excited about working with them,” APAM Executive Director Simon Cooke said. APAM has taken over the management of four assets secured by £295M of debt, including Intu Eldon Square in Newcastle and Intu Potteries in Stoke. 

“But for the last two or three years the wider organisation hadn’t been able to motivate them and they hadn’t been given the opportunity to put in place the very positive ideas they had.”

For Cooke, one of the issues that led to Intu’s downfall was that it implemented a national brand and strategy at the moment it should have been thinking locally. In 2013 and 2014, the company spent £25M rebranding its centres and putting the Intu name on all of them.

“For the past few years, everything has been moving towards the local,” he said. “Everyone loves things that are artisan, the independent pub or restaurant or shop. You don’t want a policy of corporate unity. This is a great opportunity for individual centre asset managers to make these centres serve their local community, not serve a corporate HQ in London or the equity markets.”

This is highly likely to mean the Intu name will be dropped from centres, and a more bespoke policy will be created about to whom stores can be leased.

“It’s about signage and not having a central policy that says you have to lease to major high street multiples, and can’t lease to a vape shop or artisan bakery. You give the community what it wants and needs,” Cooke said.

There is the opportunity to have a very different type of conversation with the tenants in Intu’s centres. Analysts consistently pointed out that Intu shied away from striking new deals with retailers because it would have required taking a haircut on rental levels, leading to artificially inflated estimated rental values. “Intu's pains are largely self-inflicted; management appear to hope for the best, rather than preparing for the worst,” Green Street said in 2019. When the levees broke as a result of retailer failures and the impact of the coronavirus, it was already too late for Intu. 

“There will be a new infusion of energy, vitality and reality,” Ellandi co-founder Morgan Garfield said. Ellandi has taken over the management of the Intu Merry Hill centre in the West Midlands, which has £436M in debt, and the Intu Milton Keynes centre in Milton Keynes, which has £138M of debt.

“We’re picking up the phone to retailers who are saying to us, great, now we can have a conversation at last.”

For all of the positivity, there are a lot of tough decisions ahead for the lenders that now control Intu’s assets and the companies managing them. 

There is a possibility that Intu’s lenders will have to take a haircut on their loan positions. The company’s last official valuation was in March, undertaken before the impact of the pandemic, and many of Intu’s centres were already close to being worth less than the debt secured against them. As retailers negotiate lower rents or go to the wall, those values are likely to fall significantly.

That will leave lenders with a choice: sell now or hold and try and increase the value. Banks don’t want to own assets for the long term; they are trying to protect their loan position, but the best way of doing so is far from clear. 

The first half of 2020 was the worst period on record for shopping centre investment deals: UK retail is highly illiquid, and selling now would see Intu’s lenders risk exiting at the very bottom of the market, potentially at less than the value of their loan. 

Only one of Intu’s UK assets is formally up for sale: the 2M SF Trafford Centre in Manchester, the UK’s third-largest centre and the jewel in Intu’s crown. The level at which it sells will be closely watched by Intu’s other lenders. 

But holding on to assets and trying to increase their value is not a sure thing either. Intu still owns the assets, and the banks and bondholders that control them still have loans in place. There are still interest payments to be made on these loans, and if the income from centres is not enough to cover these payments, lenders may be forced to take a write-down in their accounts. 

And improving the income and value of a shopping centre costs money.

“It is the challenge facing every shopping centre in the country right now,” Ellandi’s Morgan said. “A centre that was the right size in 1990 might not be the right size in 2020. You need to bring in other uses to find new income streams, and create competition among remaining retailers so that you can introduce some rental tension.”

Intu had significant plans in place to turn its shopping centres into modern mixed-use schemes. It planned to put more leisure in place at the Trafford Centre, build BTR residential and hotels at Lakeside in Kent, and put more food and beverage outlets into its centres. But there was one problem — it didn’t have the money. If Intu’s lenders want to really increase the value of the assets they now de facto own, the process will take significant capital expenditure, and they will have to decide if they want to undertake this kind of outlay. 

For now though, it is a fresh start, with all of the possibilities that brings.

“We wouldn’t be doing this if we thought shopping centres and town centres were dead,” APAM’s Cooke said. “There is an exciting opportunity to reposition these centres with less emphasis on letting space to traditional retailers.” 

The breakup of Intu might just bring it closer to the people that these centres ultimately need to serve.