The borrower view: Capital & Regional’s Stuart Wetherly

The UK REIT's group finance director Stuart Wetherly explains the restructuring of the retail owner’s debt.

Stuart WetherlyIn October, UK retail REIT Capital & Regional reached an agreement with its lenders to restructure and reduce £265 million (€311 million) of debt secured over four of its assets – The Mall Blackburn, The Mall Maidstone, The Mall Wood Green and 17&Central Walthamstow.

It acquired £100 million of debt outstanding with NatWest Group for £81 million, part-funded by raising £30 million through an open offer and using £16.9 million of cash. Meanwhile, existing lender Nuveen Real Estate bought £35 million of the NatWest debt from C&R, increasing its lending against the assets to £200 million.

Group finance director Stuart Wetherly explains why it was time to revisit the debt situation.

What prompted the debt restructuring?

The last couple of years have clearly provided a challenging backdrop for shopping centres, and while we’ve fared better than many, we’ve still seen a big market movement that has impacted valuations, with a knock-on effect on LTV. While all our centres remained open throughout the last 18 months, and cashflows have been reasonably healthy, the pandemic has impacted there too.

Pre-pandemic, this facility had good headroom but the compounding of valuations put that under pressure. We spent a lot of time talking to the two lenders about what the best solution was. NatWest expressed a desire to exit, and we then commenced a dialogue with Nuveen about buying NatWest out in combination, and they were very supportive.

Why was Nuveen willing to increase its exposure?

We have had this loan for almost five years, so we have a very good relationship with them. More importantly, they have seen how robust the assets have been despite the challenges of lockdowns – they are still generating enough money to invest further capex, which will help support growth, for example, and we have made good progress with reletting space where retailers have exited.

For the new debt, Nuveen agreed to an interest rate of 6 percent plus SONIA, on the same term as the existing debt, which runs out in 2027 with a one-year extension option. That’s another advantage for us because the NatWest debt had a maturity of 2024. It is also on a more flexible basis in terms of repayment, with no prepayment penalties, so we will have the ability to bring it down over time.

A two-year loan covenant waiver was agreed as part of the deal – why was this?

When we had the ability to buy out debt at a discount, it made the economics of putting new equity in much easier to rationalise. But we felt that if we were putting a substantial amount of equity back into the facility, we needed to be very confident that we wouldn’t face any issues with covenants. We hope we have seen the worst of covid, but this gives us two years to make sure the business is fully back to normal.

You reduced your company LTV through the restructuring – why was this important to you? As we are a REIT, there are expectations that the leverage levels are not beyond a certain point, and we wanted to give comfort to investors on that front. We were conscious that debt levels have been too high, and we particularly wanted to bring our core facility back to a normal compliance level.

How strong is lender support for UK retail?

The appetite is returning for specific types of retail. We are very confident about our type of day-to-day shopping centres: they serve their local communities and people will go there several times a week. We think that sort of retail has more defensive characteristics, particularly around change of use.

Where you can really demonstrate you’ve got a strong, secure income, lenders are prepared to have a look, although some are very cautious. Hopefully, as we go into 2022, the return of some confidence in the sector will continue. Pricing is still very specific to the asset. I think if we had been refinancing most of our portfolio four or five years ago, we [would have been] typically starting at 50 percent LTV, whereas I think a lot of lenders will now be at 40 percent and margins will have increased.

What do lenders want to see from borrowers when financing retail?

Ultimately, lenders are focused on cashflow coming in, how diversified that is, and the security of that against the debt. We’ve seen a lot of pressure on fashion and department stores, which have been the most vulnerable to the move online, and so assets with a high focus on those sectors have suffered most and have probably got more pain to come.

We’ve certainly not been immune to that – Debenhams was our biggest tenant and we have had some fashion exposure – but the strategy we implemented a few years ago to move away from fashion and to focus on grocery anchors and alternative uses, including healthcare and job centres, has really helped.

We’re very optimistic about the future: the investment market is beginning to stabilise and this new deal really resets our core facility, helping us to continue implementing our strategy.