Money

Shopping centres breach loan terms after stores fail


UK shopping centres owned by private equity groups including Lone Star and Oaktree have breached the terms of their loans, after retail failures triggered steep falls in property values.

Market players say the breaches will probably trigger a series of asset sales that will crystallise price falls in secondary retail properties.

Two shopping centres owned by the Florida-based private equity group HIG Capital are among the latest to exceed agreed ceilings on loan-to-value ratios thanks to the falling values of the properties, according to people briefed on the assets.

That follows a similar breach this month by three shopping centres owned by Howard Marks’ Oaktree Capital, after their value shed 17.9 per cent in 18 months.

Earlier this year, a portfolio of five shopping centres owned by the US-based buyout group Lone Star was surrendered to the Austrian lender BAWAG after a similar breach.

The centres are the legacy of a buying spree in 2014 and 2015 by mainly US-based private equity groups, which aimed to take advantage of price drops from pre-financial crisis highs.

But a series of retailer insolvencies have helped to push values down much further in the past year, leaving some second-tier UK shopping centres struggling for survival and lacking the resources to attempt a turnround.

The rating agency Moody’s said yields on UK secondary shopping centres had widened by almost 157 basis points in two years, equating to a value drop of 18 per cent.

“We expect the trend of steadily increasing [loan-to-value ratios] to continue,” Moody’s said. “In the event of an economic downturn, the higher leverage combined with a decline in value on the underlying property will result in higher loan defaults upon refinancing and greater loss severities.”

Private equity-owned centres have been particularly at risk because they tend to carry relatively high levels of debt. Oaktree’s trio of centres in Dunfermline, King’s Lynn and Loughborough reached a loan-to-value ratio on their senior debt of 77.7 per cent, above the 75 per cent agreed with lender Goldman Sachs, according to a stock market filing.

Goldman Sachs issued a commercial mortgage-backed security against the assets last summer. Another lender, DRC, lent mezzanine financing against the centres and has been given until the end of the month to “cure” the breach.

An agent handling shopping centre investment deals, who asked not to be named, said: “There are loan-to-value breaches right across the market. Often there is a period in which you can cure it by hoping the value recovers, but banks become more stressed when interest cover is a problem.”

Some lenders are opting to “pretend and extend”, a phenomenon that became familiar during the financial crisis in which a lender agrees not to act on a covenant breach.

RDI Reit, a listed landlord, said last month it had agreed a “standstill” until October 11 with lender Aviva on £144.7m of debt against four shopping centres that had exceeded a loan-to-value ceiling of 85 per cent.

Aviva has agreed not to take control of the assets until that date while the parties “progress a consensual sales process or restructuring of the facility”.

Other investors are also looking to sell. HIG is in the process of selling one of its two centres, in Newbury, Berkshire, after receiving inquiries from potential buyers seeking to redevelop the site, according to a person briefed on the situation. It is also in talks about further investment into its other site in Bradford, the person said.

But one property investor said lenders were reluctant to issue new debt against second-tier shopping centres.

“The universe of lenders has contracted significantly and the terms have also become more difficult — it’s very different from only 12 months ago,” the investor said.



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