Trafford Centre Refinancing Looms As Retail Swallows Hard

Shopping centre owner Intu is to raise £750M of new debt secured against the Trafford Centre as part of a refinancing package.

The Trafford Centre is the jewel in the Intu crown, and a refinancing package could almost halve the debt repayments on a commercial mortgage-backed security inherited from Peel Holdings. But will it be enough to convince the stock market that Intu has its debt issues under control?

The Trafford Centre has always had something unreal about it. Designed to resemble the Vatican, filled with palm trees and camped-up with the kind of bling normally found only in the bathrooms of Russian oligarchs, it sits oddly in Manchester's respectable western suburban fringes. The news that the centre's mermaid fountain is to be animated, so that the mermaids can sing a selection of popular love songs comes, in that context, as no surprise.

But beneath the distracting layers of kitsch everything at the Trafford Centre is about cold, hard cash. The shops are for selling, and the centre itself is about making handsome returns for its owner, retail REIT Intu.

The problem for Intu is that the Trafford Centre's debt is expensive, and the loan-to-value ratio of the Intu business in general is under pressure.

The centre is valued at £2.1B and has a little over £1B worth of debt secured against it in the form of around £750M of expensive-to-finance commercial mortgage-based securities, and another £250M junior loan lent by the Canadian Pension Plan Investment Board. A consortium of lenders is now being approached to refinance the CMBS element, potentially reducing the loan-to-value ratio from today's 49%, Estate Gazette reported.

The CMBS, inherited when Intu took over the interests of deputy chairman John Whittaker's Peel Holdings, is not underwater (the loan-to-value covenant is 65%), and Estates Gazette reported that the refinancing is attracting interest from a club of lenders. The aim is to reduce the cost of the CMBS, which has a margin of  around 6%, with something closer to 3.5%, making a significant cost saving.

The refinancing at the Trafford Centre comes as Intu ponders an inflatated loan-to-value ratio.

Last week's financial statement revealed Intu's valuation tumbled from £10.5B to £9.2B in 2018, a fall of 13.3%. The landlord pledged to "refine the portfolio to concentrate on regional destinations" as part of a strategy to reverse a debt-to-asset ratio rising to 53%, above its 50% target. Net external debt is £4.9B, up just £32M on last year, but now looking exposed thanks to lower valuations.

In his accompanying statement, Intu Chief Executive David Fischel remarked that a further 10% fall in valuations would wipe another £920M off the valuation and amount to a 22% fall in valuation since January 2018. In those circumstances net asset value per share, already down from 411p to 312p, would slide again to 243p.

Analysts have been scathing. Intu’s leverage level is “alarming and needs to be addressed sooner rather than later,” according to analysts at real estate research firm Green Street Advisors.

In a note dated 14 January on the UK’s largest listed property companies, Green Street said Intu and fellow retail REIT Hammerson were “playing with fire" on leverage issues.

Intu’s reported loan-to-value ratio is 51%, but Green Street said that if its portfolio was revalued to match current retail values, that would rise to 74%.