COMMENT For the retail and hospitality sectors there remains no sign of any immediate respite. But although the outlook is challenging on any measure we care to pick, remember we worked our way through the devastating impact of the global financial crisis; we will do the same again.
We face less a capital markets crisis and more of a trade and earnings crisis. This time around, capital availability is relatively strong but national and regional ‘whack-a-mole’ lockdowns and the devastation they leave behind are driving this money to safer investible pastures, less affected by ‘moles’. Capital for retail exists but it is constrained and requires a lot of convincing, which together with the impact of the pandemic on retail footfall, presents an unwanted double-whammy, with both in need of addressing to succeed through this crisis.
The health of the retail sector was clearly weak pre-Covid-19 but as the months have rolled on since March the impact of the virus is forcing the process of reinventing and repurposing. Creating the ‘new normal’ – a vibrant, modern, inclusive, right-sized, innovative and ultimately customer satisfying destination experience – is required. The UK has always been a world leader in retail and now we are at the forefront of redefining things again.
Walk in a lender’s shoes
Few landlords carry immunity, even those without debt to service, so focus is on individual discussions with tenants, establishing in the ‘new normal’ their willingness and ability to pay rent and on what terms. The current rent collection battlefield tales are ugly, with some assuming that Q4 will be effectively rent free and some kind of return to normality in 2021, though even then on a much-reduced basis. All of this makes business planning pretty tricky.
For geared landlords, protecting your retail investment means turning around the health of your retail assets with the ‘new normal’ asset management plan and, critically, convincing capital providers it will work. Whether it is to hold onto your existing loans, to be offered a restructure or to refinance, your plan is of immense importance to your funders and co-investors. The sad travails of Intu are well documented and it is unlikely to be the last Leviathan.
In preparing for debt discussions it is worth putting yourself into the shoes of the lender and its broader strategic options:
A. Restructure: remain in the ‘good book’. This is the preferred option but one that may involve taking capital impairment and will require confidence in the borrower’s asset management plan
B. Consensual exit: backing a borrower plan to repay or refinance over an agreed period of time, minimising capital loss by supporting an orderly exit
C. Loan sale: selling the loan to a third party, achieving an accelerated deleverage but at a discount to loan balance
D. Termination: appointment of an insolvency practitioner. This is the last resort in cases where it’s considered no longer economically viable to continue negotiations.
Face the danger
To best prepare ahead of lender discussions, here’s what we suggest doing as a starter:
- Face the danger: yes, model your ‘base case’ and ‘upside case’ financial projections, but do the ‘downside case’ too – create your two ‘book ends’ of possible future outcomes.
- Test covenants: for each scenario, foresee if and when your loans may be in breach of the loan agreements.
- Prepare your story: back up your financial modelled scenarios with a clear management strategy that see your assets back to normal or a ‘new normal’. This may require a three to five-year plan.
- Approach your existing lender: in the short term, there is likely a higher chance of achieving covenant waivers, or additional funding, from your own lender. Until the impact of the Covid-19 is better understood, lenders are generally offering support to borrowers whilst we’re still in the midst of this pandemic. Things will change, so act quickly.
- Test the finance market: engage with other lenders to assess what lending you might be refinancing into soon.
- Set your game plan: focus on the controllable factors. You know your ‘book-ends’, the remedial management actions and financing outlook. Whilst you don’t know what will happen in the future, you can set out ‘trigger’ events, tell-tale signs, that will move the dial. Prioritising each trigger event in terms of impact, place the remedial actions against each – lines of attack and defence.
- Implement the game plan: likely a staged process as you approach or reach ‘trigger’ events. Instead of waiting, be dynamic and proactive by preparing information for attracting potential new equity and/or loans and start a search process. This remains within your control and you stay ahead of the game.
The above is simple to understand but inevitability complex to execute. The process of working with lenders is a dynamic one, as is the repositioning of a shopping centre or retail park, so being properly advised by those who have experience of being on both sides of the negotiating table, knowing the lenders, the assets and loans in detail will be valuable and perhaps the ‘new normal’ for the capital advisory world.
The ‘double-whammy’, the funding solution and the economic health repair for leveraged retail investments, more than ever before, requires interwoven specialist retail and financial expertise. It is for this reason that Bayhead and Dunluce Property have teamed up, offering a service of experienced and creative retail expertise with capital funding advice. Avoid playing ‘whack-a-mole’ with potential issues within your retail portfolio, by taking creative leadership and robust management actions now.
Andrew Wilson is managing partner of Bayhead Advisers
