RDI REIT shopping centre loan breached covenant
In a trading update released on 28 February 2019, RDI REIT notes that four of its UK shopping centres namely Grand Arcade, Wigan; Weston Favell, Northampton; Birchwood, Warrington and Byron Place, Seaham, are financed by a long-term fixed-rate debt facility with Aviva. Given the deterioration in values for UK shopping centres and the resultant increase in the lender’s loan to value ratio, all net operating cashflows from this portfolio are being retained within the facility and are anticipated to be used to reduce the outstanding facility balance. Net operating cashflows from the portfolio after interest costs are approximately GBP6.5 million on an annualised basis.
The facility is non-recourse to the company and has a current outstanding principal balance of GBP144.7 million at a fixed rate of 5.5% per annum and matures in April 2042. Under the terms of the facility agreement, the company has the right to cure any financial covenant breach through part prepayment of the facility or through providing additional collateral. The board will carefully consider the merits of committing additional capital to the facility should there be a further deterioration in values.
[QD comment: When the financing facility was put in place, Aviva would have insisted that the value of the property would have to always be a certain multiple of the value of the debt – as a way of protecting itself. This covenant has kicked in as a result of the falling values of the centres. By diverting the rents from these centres towards paying off some of the loan, Aviva will hope that the situation rectifies itself. It means though that RDI cannot use those rents elsewhere in its business or to fund its dividends. If the shopping centre values continue to fall and the covenant breach gets worse, Aviva may be able force the sale of the centres. If the sale proceeds are not enough to cover the debt, Aviva cannot come after RDI for the balance – the debt is ‘non-recourse’ to RDI.]
Outlook
The company also published the following outlook statement: “Notwithstanding the strong operational performance across the business, including a resilient income performance from the UK shopping centre portfolio, ongoing concerns around certain department stores and the wider retail sector continues to place material uncertainty over UK shopping centre valuations. In this context, and as advised alongside our full year results in October 2018, the board has continued to place a greater emphasis on liquidity and maintaining lower levels of leverage. Net disposal proceeds generated in the prior financial year and limited reinvestment has resulted in approximately GBP40 million being retained and applied toward lower leverage.
Given the company’s focus on maintaining lower leverage, underlying earnings for the first half of this financial year will reflect the impact of net disposals and leverage reduction in the prior financial year and the increase in finance costs associated with the early extension of the company’s principal UK debt facility, as outlined above. As a result, underlying earnings for the first half of this financial year are expected to be broadly in line with the second half of the previous year, before taking into account the non-recurring finance charge of GBP0.9 million. Distributions will need to take account of the above and the cashflows being applied to the Aviva facility.
Given the current economic uncertainty and challenging retail environment, a number of options are being actively considered to accelerate progress in further reducing the group’s loan to value ratio. This may include a continued rationalisation of the portfolio to sectors benefitting from positive structural change and occupier demand, a more focused allocation of capital and a further reduction in overhead costs.
A further update will be provided alongside the interim results.”
RDI : RDI REIT shopping centre loan breached covenant