Overview
- We have reviewed Intu Metrocentre in light of updated operating performance and an updated market valuation.
- Following our review, we have lowered to 'B (sf)' from 'BB+ (sf)' our rating on the fixed-rate secured notes.
- While COVID-19 will likely accelerate performance declines for certain properties, especially those dependent on retail, today's downgrade does not specifically address the impact of the virus.
- At the same time, we have placed our rating on the notes on CreditWatch negative due to the uncertainty regarding the consent solicitation which has been launched.
- We believe that the terms of the consent solicitation may have a negative impact on the transaction.
- Since our last review in May 2020, Intu Properties PLC has gone into administration.
- Intu Metrocentre Finance is a CMBS transaction that closed in November 2013, and is secured by a single loan backed by a U.K. regional shopping center.
LONDON (S&P Global Ratings) Oct. 28, 2020--S&P Global Ratings today lowered to 'B (sf)' from 'BB+ (sf)' and placed on CreditWatch negative its credit rating on Intu Metrocentre Finance PLC's fixed-rate secured notes.
Rating Rationale
Today's downgrade follows our updated review of the transaction's credit and cash flow characteristics. We believe that a continued decline in cash flows from the property and the decrease in the market value of the property, combined with our view of an increasingly challenging environment for retail tenants, has worsened the notes' credit metrics.
Specifically, the downgrade to 'B (sf)' reflects the sharp decline in the market value, the increased loan-to-value (LTV) ratio since December 2019 by 19%, the reduction in the interest coverage ratio, and increase in vacancy rate. Due to such factors, as well as the challenging external conditions, we believe that the notes are more susceptible to the risk of default and loss under today's uncertain market conditions.
Today's CreditWatch negative placement reflects the uncertainty around the consent solicitation (launched on Oct. 26, 2020) and the potential effects of additional debt, and the impact that this will have on the transaction. We have yet to receive confirmation as to its approval and therefore, we have not fully determined the magnitude of the potential rating impact.
Transaction Overview
The transaction is backed by a fixed-rate interest-only loan secured on the Intu Metrocentre regional shopping center and associated retail park, in Gateshead, South West of Newcastle in the U.K.
Intu Metrocentre until recently was owned by Intu Properties PLC for nearly 25 years. The shopping center is one of Europe's largest covered shopping and leisure destinations with over two million square feet of leasable floor area, as well as multi-story car parks, comprising almost 10,000 spaces, and a bus/coach park.
The owner and manager of the shopping center, Intu Properties PLC, has gone into administration since our last review in May 2020. As a result, the borrower will likely appoint a new asset manager and property manager to manage the property on a daily basis by the end of the month.
The latest reported market value for the property was £532.1 million, compared to £672.8 million in our last review. This reflects a 21% decline since our last review in May 2020 and a 44% decline from the property's peak value of £949.1 million in 2016.
The LTV ratio has increased and the interest coverage ratio (ICR) has decreased since our last review. Based on the updated information, the transaction has a LTV ratio of 91% and a historical ICR of 1.4x. This compares with December 2019 figures of 72% and 1.9x, respectively.
The tenant profile remains in line with the tenants that were in occupation since our last review. The tenants comprise a combination of internationally and nationally recognized retailers (such as Next, Primark, Boots, and Marks & Spencer), with the top 10 tenants accounting for 29.5% of the passing rent, with no tenant contributing more than 5.2%, 1% higher than at our last review. There are 373 leases in place and the property's weighted-average unexpired lease term is 8.1 years.
Since our previous review, the property's vacancy level has increased to 9.2% (from 8.2%) and reported net income continues to deteriorate, declining by 15%. We understand this is due to a combination of declining gross income and a spike in operating costs primarily due to increased void costs and landlord contributions to the service charge. The increased operating costs is also associated with the measures that shopping centers have had to implement to comply with current social distancing measures. The ongoing company voluntary arrangement (CVAs) and administrations have shifted an increasing number of tenant agreements to turnover deals, significantly reducing base rents.
In recent years, more retailers have suffered financial difficulties, which is being exacerbated by the effects of the COVID-19 pandemic, and there is the risk of further increased vacancy levels and diminishing rental levels. However, the risk is somewhat mitigated in the longer term by the shopping center's strong retail location, and the potential to create value through other asset management initiatives.
We have calculated the S&P Global Ratings net cash flow (NCF) using updated reported numbers together with market information. The analysis has also considered the additional income sources beyond the contracted rents (such as Intu experiences), as well as the ground rent due and payable in relation to the asset's long leasehold tenure.
We have then applied our 6.4% capitalization (cap) rate against this S&P Global Ratings NCF and deducted 5% of purchase costs to arrive at our S&P Global Ratings value. As our S&P Global Ratings value has resulted in a higher figure than the current market value, we felt it would be prudent to adopt the current market value as our S&P Global ratings value, which results in a 6% S&P value decline since our previous review.
| Loan And Collateral Summary | ||
|---|---|---|
| Review | As Of October 2020 | As Of May 2020 |
| Data as of | June 2020 | December 2019 |
| Securitized debt balance | £485 million | £485 million |
| Interest coverage ratio | 1.4x | 1.9x |
| Whole LTV ratio | 91% | 72% |
| Net rental income | £33.1 million | £39.1 million |
| Vacancy rate | 9.2% | 8.2% |
| Market value | £532.1 million | £672.8 million |
| Net yield | 5.9% | 5.5% |
| S&P Global Ratings' Key Assumptions | ||
|---|---|---|
| Review | As Of October 2020 | As Of May 2020 |
| S&P Global Ratings vacancy | 15.0% | 10.0% |
| S&P Global Ratings expenses | 21.0% | 14.0% |
| S&P Global Ratings net cash flow (NCF) | £34.6 million | £39.1 million |
| S&P Global Ratings value | £512.0 million | £579.0 million |
| S&P Global Ratings cap rate | 6.4% | 6.4% |
| Haircut-to-market value | 4% | 14% |
| S&P Global Ratings LTV ratio (before recovery rate adjustments) | 95% | 91% |
Our S&P net cash flow is calculated using the current passing rent, plus the estimated rental value for the reported vacant space. We have also added back the average other income for the last four years as we believe that once the shopping center is fully operational after all the lockdown restrictions, this income will be available to pay the interest on the loan.
Other Analytical Considerations
We also analyzed the transaction's payment structure and cash flow mechanics. We assessed whether the cash flow from the securitized asset would be sufficient, at the applicable rating, to make timely payments of interest and ultimate repayment of principal by the legal maturity date of the fixed-rate note, after considering available credit enhancement and allowing for transaction expenses and external liquidity support.
The liquidity facility and issuer debt service reserve account, which provides not less than 12 months' interest on the notes, mitigate the risk of interest shortfalls. Our assessment of the payment structure and cash flow mechanics does not constrain our rating in this transaction.
Our analysis also included a full review of the legal and regulatory risks, operational and administrative risks, and counterparty risks. Our assessment of these risks remains unchanged since our previous review and is commensurate with the rating assigned.
Rating Actions
Our rating in this transaction addresses the timely payment of interest, payable semi-annually, and the payment of principal no later than the legal final maturity date in December 2028.
Together with the ongoing structural shift in the physical retail sector, we believe that an increasingly challenging environment for retail tenants is affecting this transaction, reflected in the continued decline in the reported operating performance and market value of the property. We have factored this into our analysis when adopting the current market value as our revised S&P Global value.
The combination of the above factors results in an S&P Global Ratings LTV ratio of 95%, which together with transaction-level considerations, translates into a 'B (sf)' rating for the fixed-rate secured notes.
The borrower launched a consent solicitation on Oct. 26, 2020, which includes raising an additional £25 million in debt, which would rank ahead of the CMBS notes. We believe that the proposed changes will have a negative impact on the transaction and would increase the LTV ratio. This would most likely lead to a deterioration in the transaction's credit quality. If the proposed changes are implemented, we believe that they may negatively affect the leverage in the transaction, and hence the rating. We have therefore placed on CreditWatch negative our rating in this transaction, in line with our criteria (see "Related Criteria").
S&P Global Ratings acknowledges a high degree of uncertainty about the evolution of the coronavirus pandemic. The current consensus among health experts is that COVID-19 will remain a threat until a vaccine or effective treatment becomes widely available, which could be around mid-2021. We are using this assumption in assessing the economic and credit implications associated with the pandemic (see our research here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.
Environmental, social, and governance (ESG) credit factors for this credit rating change:
- Health and safety.
Related Criteria
- Criteria | Structured Finance | General: Counterparty Risk Framework: Methodology And Assumptions, March 8, 2019
- Criteria | Structured Finance | General: Incorporating Sovereign Risk In Rating Structured Finance Securities: Methodology And Assumptions, Jan. 30, 2019
- Legal Criteria: Structured Finance: Asset Isolation And Special-Purpose Entity Methodology, March 29, 2017
- Criteria | Structured Finance | General: Global Framework For Assessing Operational Risk In Structured Finance Transactions, Oct. 9, 2014
- Criteria | Structured Finance | CMBS: European CMBS Methodology And Assumptions, Nov. 7, 2012
- Criteria | Structured Finance | CMBS: CMBS Global Property Evaluation Methodology, Sept. 5, 2012
- Criteria | Structured Finance | General: Criteria Methodology Applied To Fees, Expenses, And Indemnifications, July 12, 2012
- General Criteria: Principles Of Credit Ratings, Feb. 16, 2011
- General Criteria: Methodology: Credit Stability Criteria, May 3, 2010
- Criteria | Structured Finance | General: Methodology For Servicer Risk Assessment, May 28, 2009
- Criteria | Structured Finance | CMBS: Methodology For Analyzing Loan-Level Limited Purpose Entities In European CMBS, Sept. 1, 2004
Related Research
- S&P Global Ratings Definitions, Aug. 7, 2020
- Intu Metrocentre Finance PLC's CMBS Rating Lowered On Worsened Performance, May 7, 2020
- Credit FAQ: A Deeper Dive Into The Potential Credit Effects Of COVID-19 On European CMBS, April 2, 2020
- European CMBS: Assessing The Credit Effects Of COVID-19, March 24, 2020
- 2017 EMEA CMBS Scenario And Sensitivity Analysis, July 6, 2017
- Application Of Property Evaluation Methodology In European CMBS Transactions, April 28, 2017
- Global Structured Finance Scenario And Sensitivity Analysis 2016: The Effects Of The Top Five Macroeconomic Factors, Dec. 16, 2016
- European Structured Finance Scenario And Sensitivity Analysis 2016: The Effects Of The Top Five Macroeconomic Factors, Dec. 16, 2016
| Primary Credit Analyst: | Carla N Powell, London (44) 20-7176-3982; carla.powell@spglobal.com |
| Secondary Contacts: | Oliver Thomas, London + 44 20 7176 8589; Oliver.Thomas@spglobal.com |
| Mathias Herzog, Frankfurt (49) 69-33-999-112; mathias.herzog@spglobal.com |
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