Intu Shows South African Investors Must Beware of Debts Abroad

The massive drop in share price of Intu, the South African owner of shopping centres in the UK and Spain, spotlights the dangers of debts facing South African investors seeking diversification abroad.

On March 4, Intu said it would no longer attempt to raise up to 1.5bn pounds in equity, citing “the current uncertainty in equity markets and retail property investment markets.”

Intu complies with its debt covenants but states that by July 2020 it could be in breach. Postponed full-year results will now be published on March 12.

Intu, worth nearly 13b pounds in 2006, now has a market cap of 60mn pounds. The company’s misfortune carries a crucial lessons for South African investors as they navigate the complexities of debts, whilst exploring markets abroad, says Craig Smith, head of research and property at Anchor Stockbrokers in Johannesburg.

The keys are understanding the broad property cycle and “major trends and themes such as the impact of e-commerce on sub-optimal retail formats,” he says.
Excessive debt loads leave no hiding place when an unexpected crisis such as coronavirus spread market panic.

Coronavirus may speed up the shift from malls to online shopping as people prefer or obliged to buy from home. E-commerce shares have held up well as bricks and mortar retail shares have collapsed.

Banks and bondholders will now play a crucial role in terms of Intu’s future, Smith says.

The worst-case scenario is further declines in property values which result in further erosion of underlying equity value within the business, Smith says.

“This is to some extent what the market is pricing in.”

Coronavirus has accelerated the share price crash, but debt is the fundamental problem.

“This out-turn was broadly anticipated by us even without the recent sell-off due to the Coronavirus,” according to a note from Goodbody in Dublin.

Intu is now on a “knife edge” in terms of respecting its covenants, Goodbody says.
Some have simply given up on Intu. Richard Hasson, co-head of Electus Fund Managers in Cape Town, says the firm stopped covering Intu a year ago as it was considered it uninvestable due to its excessive debt ratios.

The company says it has received expressions of interest to explore “alternative capital structures and asset disposals.” According to Smith, management now needs to focus on the underlying business operations and engage with banks, equity investors, tenants and employees to ensure a consistent and market-oriented message.

The best-case scenario, he says, is a remedy to fix the current capital structure by reducing gearing that could be achieved through a combination of asset sales and equity raising.

A clear asset disposal strategy is now essential to maximize the chances of some value recovery for Intu shareholders.

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