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Morning Sain, I think our mutual friend VitaBella has it in one sentence, "It is going to be over before, or during, summer 2020".

Since last summer you have talked, very accurately, about "the sound of rivets popping". I spent last night browsing through the detail of the RNS. I found the devil in Para 4.1. - Secured group Structure. It makes for very sober reading:

In essence there are three levels of breach, called tiers. Tier 1 is the mild slap on the wrist. T2 and things are getting hairy. T3 and the financiers have effectively taken control. These relate to LTV and Debt Service Cover. Right now Intu's secured debt is classified at Tier 2, where the LTV is between 55% and 72.5% and DSC is greater than 1.4 times, but less than 1.6x.

In Tier 2 there is an "Obligation to Appoint a Property Manager". This has been triggered, but no appointment made yet. There is a six-month window before it becomes obligatory to appoint a PM. For the words 'property manager' read, 'an unofficial Receiver/Administrator'. T2 imposes 5 restrictions on the company's day-to-day operations, including the obligation to set up a cash fund of three months anticipated interest payments, & restrictions on any further development, further borrowing & 'making certain withdrawals'.

During the following 6 months (which is where we are now) if Intu has not reduced the LTV below 55% and/or increased the DSC to greater than 1.6x, then it becomes obligatory to appoint a PM, whose views are not compulsory for Intu to follow, at least at first. As the LTV is 65% today and the asset value and income is still falling, the chances of a PM being appointed in mid-year are virtually certain. I see no point in parroting further details of this para. It's all there for the PI's to read.

The next nasty is Para 4.6 - Other Asset Specific Debt. It covers 8 UK properties, setting out the LTV covenant trigger and the current LTV %age. Four of them, St. Davids Cardiff, Milton Keynes, Chapelfield & Merry Hill, are within 2% of triggering the covenant. Uxbridge & Trafford Centre are within 6% of triggering. Just two centres are a decent distance, Barton Square and Derby. Intu has already made penalty payments in respect of Uxbridge, Chapelfield & Merryhill totalling £36 million since 20th January

Finally, there are loss-making interest-rate swaps. All currently underwater to the tune of £220 million. A penalty payment is due now of £93 million.

The truly disgraceful item is the updated valuation of Derby (about which you and I have fulminated ever since the partial sale was announced). Are you sitting comfortably, my friend? - Derby is valued at £77.3 million for 50%, as compared to £186m one year ago. They threw away £109m to pocket £186m from the KIO.

I can only surmise that the auditors forced Intu to make all these disclosures, because the next step will be their refusal to sign a "going-concern" note to the accounts. Adieu Intu.

Yes EPG, a Preference Share is equity, because on a winding up, it ranks after debt, but ahead of the ordinary shares. Typically, they were regarded as securer, because they bore a fixed interest rate and ranked ahead, whereas the ordinary shares rank behind the Prefs and carry a fluctuating dividend.

Very popular from the 1800's through to the 1920's. Seen as good for widows and orphans. Went right out of fashion in the 1930's, during the Great Depression, when shareholders realised that they really weren't any more secure. The ordinaries required profitability to pay a dividend and, the Pref holders realised, if there were no profits to pay the ordinaries, how were they going to be paid their 2%? They weren't, of course, as all insolvent companies eventually go bust and take the Prefs with them. Investors today realise that Prefs carry a skewed Risk-Reward ratio; No possibility of a capital gain and almost as much risk as the Ordinaries.

Wow!! The US betting turnover has risen from £400 million p.a., pre-NFL, to £2.3 billion at 31st December. That looks like £1.9 billion wagered in the first NFL season, with a bookie's win margin of 4.4%. Naturally initial set-up costs are heavy and sales/marketing is high as they lure new customers in, so the net result is a trading loss of £40 million.

However they say 14 states, covering 24% of the US population, are now permitting legal betting and they estimate the overall market could be as large at $10 billion pa. This number is right in the large(!) range estimated yesterday by Willie Hill, who guess that the market will end up between $5b and $20b p.a., once all the states are up and running and the bookies well set-up.

Following these results, the stockbroker Jeffries has been running their slide rule over both plc's and have substantially raised their estimates of the SP's to £135 (From £95) for FLTR and £4.00 (from £2.30) for Hill's.

The Covid-19 is causing chaos in the meantime, but for anyone with money to lock away for another 2 to 3 years, these two stocks, plus GVC (Full Year results to 31/12 due 5th March), looking to be on to something of a goldmine with sports betting in the USA.

Poker, as RNS's go, it's very clear. Intu confirm the bankers have pulled the £600m RCF, which has been blindingly obvious for months. Its' been cut by 25%, down to £440m and even that is conditional on an equity raise of £1.3+ billion. The raise is being organised by Merrill Lynch, UBS & Rothschilds. This is nothing to do with selling existing properties, or getting a "credit" of £600m from earlier sales this year, or future later sales. It's having to raise a minimum of £1.3 billion in cash now, in return for new shares being issued. Like right now. No raise - No RCF - No cash.

That's another 13 billion shares at 13 pence each. A 90% minimum dilution.

Given the law against issuing shares at less than par value, (unless stating that they're only partly-paid-up), I imagine the way around this is to split all the existing shares 5 for 1, reducing the existing 50p par value to 10 pence each and the Rights issue would then be 2 new shares at roughly 13p for every 5-1 split existing share.

When the smoke clears, and Intu is hopefully recapitalised, this would hopefully be followed by a massive share consolidation, otherwise the company would have roughly 20 billion shares in issue. Which smacks more of the wilder corners of AIM, than a would-be FTSE 250 plc. It would also produce a quoted SP north of £1, which always makes the PI's feel more secure.

Hammerson's disclose that their overall portfolio, including France & Ireland (which aren't as badly affected by online sales), has been devalued by 18.6% in the last year.

Their half-year results to 30/06/19 saw a 7.2% devaluation over six months. Meaning that the 2nd half saw a write-down of 11.4%. IOW, the fall in values is accelerating, not slowing.

This suggests to me that Intu may see a fall of greater than 10%. next week Maybe this goes some way to explaining the rise in shorts when the stock is as low as 15p.

I wonder? Per the half-year results the portfolio valuation fell by 7.2%. The full year results today say the portfolio fell by 18.6% over the year.

Does this not mean that during the second half, just ended, the value fell by 11.4%? IOW, the fall is accelerating?

"What's to be done? Suggestions in a plain brown envelope to 11 Downing St, London SW1, please." was the missing final sentence to Part 1.
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Part 2 - Residential - The 1980's provide a perfect example of how a major, seemingly obvious & sensible, reform can lead to a political maelstrom.

Back in the early 1980's, Mrs T's advisers also searched for an unarguable number on which to base the residential tax payable, which would involve the minimum expense on collection staff. The obvious number was the property's occupants. You can't argue about who is occupying a unit and so consuming local services. Charge by the head. That picks up everybody.

(I should interject here that I wasn't resident in the UK at this time and am therefore unaware of the minutiae of what went on. All I know was gleaned then from foreign newspapers.)

They called it the Poll Tax and the world went mad - demonstrations, riots, public effervescence. It nearly brought down the government and had to be withdrawn. I have no idea why the public went nuts, but they did. It seems pretty straightforward to me, from half-a-world away.

The result was a new search for an unarguable number and that eventually centred on the amount the house or flat last sold for. Many residential units are directly comparable, so there's not much room for argument. There will be some, but it can kept to a manageable number by placing the units in taxable bands. So making the precise value irrelevant. There are 8 of them and they are based on what the unit sold for, or would have likely sold for, in April 1991. Ranging in value from under £40,000 to over £320,000.

This was a mere 29 years ago. Markets are, of course, continually changing, albeit slowly, as areas move in and out of fashion, so the Act provides for regular revaluations - What did comparable units sell for in 2000, 2005, 2010, 2015 & 2020? - maybe forget doing it in '05 & '15 to keep costs down. Alas, successive governments have run like the wind away from this political nettle. But in the meantime, the changes in local markets are being ignored, which means that more and more properties are moving upwards or downwards, with respect to 1991, towards the adjoining bands. The facilities within the homes change as we add swimming pools, private cinemas & electronically controlled CCTV & heating systems.

This "List" is now almost 30 years old and without doubt out of balance. It is especially out of kilter with regard to the more expensive homes, particularly in the South-East, where multi-million pound homes are common. £10 million houses in Millionaires Row, Hampstead, with ten or 15 bedrooms, pay the same council tax as a mere £1.5 million pound home just 400 metres away. Is this fair & reasonable? I make no pretence to know, but there is certainly a case for extending the bands above Band H, which is all units above £320,000 in 1991.

Yet again we are left with a politically unbalanced tax r

Part 1 Commercial - We tax property because it's a significantly valuable asset. Both national & local governments always need money to pay for the services they provide to us. So far, so simple. The difficulties start when you try to pin down which element of the value of a property that you wish to tax. That's because a valuer has to be paid to assess a notional value, before the government decides the percentage that it wants to collect. This assessment is theoretical & we can all argue with a theory.

Thus the taxpayer must have the right to challenge the capital value, or rental value, assessment levied against his property, & so the difficulties start. An army of assessors is required nationwide, the District Valuer, & the surveying profession provides the taxpayer with another small army of specialists to defend the taxpayers against any "unfair" assessment. In this era of restraint on both local & national government expenditure, the DV is an anathema, because he breeds Valuation Courts, paperwork beyond imagination & interminable delays to updating records, all of which requires an ever-growing headcount. Plus, every five or ten years the DV has to go out & update all the values. This costs a fortune & always caused consternation amongst the general public and uproar amongst the tabloids, as an old widow pensioner, living in a mansion in suddenly fashionable, say, Hackney, is now asked to pay £20,000 a year in residential rates. Bad news for the political classes.

The solution to this knotty problem is to get away from arguable numbers. We want certainties. Something unappealable. A quick & dirty number that produces cash without much expense on the part of the collector. PAYE is brilliant because your payslip says how much you were paid and the tax rules say how much must be deducted. No argument there.

Starting in the 1980's, Mrs T led the search for root & branch reform. Most commercial property is rented by the occupier, so the easy solution was, and is, to gear business rates to the rent being paid by the tenant. In an era of rising rents, the balance was in favour of the tenant. The local authority got to increase the Rateable Value only after a rent increase kicked in & that remained static for five years until the next rent increase. Tenants did not complain.

The difficulty comes today when rents are falling fast, the valuation courts are clogged with appeals & the next major revaluation is years away. All at a time when local govt. is desperate for cash.

None of this is totally logical because all systems are imperfect. The valuation system is very slow. It's not geared to providing fast relief in an emergency. Whatever Mr. Sunak puts forward in March can only be in some form of abatement, or postponement under the current regime & further, this will oblige him to shovel into other central government revenues to pay the local authorities for the cash they've lost, or they'll go broke.

What

There's always a danger in a PLC with just a 20% float and the other 80% tightly held in family trusts, that the majority will one day lift two fingers towards the minority.

The Freshwater trusts don't want income because it's highly taxed and they're all rich anyway, so the yield has always been low at 2%, when it could easily and justifiably have been 6%. The problem comes when optimists, such as this correspondent, take a view, that one day, the family will buy out the minority. We, quite reasonably, expect fair play and an offer close to NAV.

Instead, our patience is rewarded with an offer at a 33% discount to NAV of £120 per share. It's a "final" offer and comes with the express threat that the majority, if thwarted, "will seek other ways to take the company private". In other words, lock in the minority for evermore, with little chance of ever realising their capital value.

Looked at in overall financial terms, the company has a value of almost £2 billion. The minority's are is worth £400 million. The majority is offering them £260 million cash and are, effectively, going to walk away with an unearned, undeserved, £140 million of the minority investors money, waving two fingers at the rest of us.

If that isn't borderline market abuse, I'd like to know what is.

Holy Smokes, Sain, Have you seen this am's RNS from Hammerson? They've finally flogged off the retail centres they've been marketing for almost two years, but, talk about having to bite the bullet, they could only sell them at a yield of almost 9% and at a 23% discount (That's not a misprint - Twenty Three Percent) to their 30th June 2019 valuation.

Now, I appreciate that comparing retail parks to prime centres is like contrasting camels to thoroughbred racehorses, but it does make me wonder whether my January guess that the worst that Intu might see was a 15% drop in values over the same six months, was possibly a tad optimistic. We shall see on the 5th.

This sale, the biggest in the sector since 2010, should reduce their overall LTV to under 40%, yet the SP is still down 60%, which goes some way to explaining why Intu's fall has been 95% with their LTV up at 65%+.

Hammerson reveal their annual results on Tuesday. We should get a good read-across to Intu from how much the valuers revalue that UK portfolio, which includes Brent Cross, The Bullring and Cabot Circus. More than 10%, or less? Interesting times.

Umeed, are you 'avin' a larf' with that hotlink to Christies? Their opening para has just given me my best laugh this week;

"A vibrant and varied retail offering is the cornerstone of any town centre, and the 'bricks & mortar' part of the sector is continuing to perform very well in the face of competition from online retailers."

We should all rush round and buy an eighth of whatever they're smoking. It's clearly brilliant stuff. Either that, or Christies haven't updated the verbiage on their website for several years!

As Sain says, there's an effective moratorium on bank lending to retail investors. Although, if I was Bill Gates, I'd be tempted to offer the shareholders 25 pence, pay off all the mortgages, put some proper management in place from LandSecs and British Land and pop the whole portfolio in trust for the grandchildren. They'd be zillionaires in 25 years - Maybe? Who knows where this online business will end up? - 30% of the retail market, 40%, 50%? We just don't have a clue and that's why the banks won't touch it, unless you've got security like Fort Knox, to keep them safe.

Vitabella, Yes. You're right. But the reason I said I wouldn't want to be a PI today, is because of the amount of money that needs to be raised. I reckon an RI would need to raise roughly £2 for every existing share, to raise about £2.5 billion in equity.

If I'd bought, say, 5,000 shares in 2018 at £2, held them and they're now worth £600. It's a really tough question to be asked to double the bet, put up another ten grand to stay in the game, because I'd need to see the new stock double in value, before I got back on an even keel. And all the while the market value of shops is falling due to the online migration of shoppers, with no bottom yet in sight.

My suspicion/intuition is that many PI's would pass on the opportunity, but I am regularly wrong.

Sain, I go away for a long w/e in France and all hell breaks loose today. Like you, I spent yesterday wading through Link's website. Their balance sheet seemed to have a reasonable slug of cash at their year-end, 30th September. Also, they have only 12% gearing on their portfolio. The two boys in their 40's who've built it up are obv. very bright indeed and the NEDs look a good team too. It looks like they could gear-up their existing portfolio to recapitalise Intu, without remotely straining their balance sheet.

All the while my question was; why are they talking to JW? Surely, they should be talking to the folks with the king-sized problems - the lenders and financiers, whose loans are in danger of getting unpleasantly close to the property values. JW is now irrelevant unless he's prepared to sink a monster amount of cash into retaining his 55% shareholding.

Plus, my experience of dealing with the Chinese, admittedly in Canada in the US in the 80's & 90's, is that they are the toughest negotiators in the world, bar none. If they're selling, the price is top dollar. If they're buying, their offers take the heads off the worms on the golf course. Plus they typically want 100% control and see no point in partners. Thus, I wasn't surprised to get home tonight and see they've backed off.

The cynics here wonders if they affected serious interest to get a good look at the books and are now sufficiently knowledgable to start talking to the bankers. I wouldn't want to be a minority shareholder right now.

The Observer says that annual results will be out in the next couple of weeks and will definitely be accompanied by a fundraising.

https://www.theguardian.com/business/2020/feb/08/intu-unknown-retail-landlord-fundamental-threat

Part 2.

Frankly, I find the goings-on here rather a mystery. The CEO walked out in the Spring. The Interim CFO likewise in August. The writing has been on the wall about the overstretched finances for two years, since mid-2018. The company pays lip-service to "repairing the balance sheet", but nothing meaningful happens. The LTV ratio continues to deteriorate. Major investors started dumping the stock in 2018 and by the end of that year the short-position was over 5%. There is a major shareholder with over 50%. The board can do nothing without his agreement. He is an extraordinarily wealthy man, but most of his assets are in private companies, some in offshore-jurisdictions where financial disclosure rules are less than in the UK. So his cash position and thus his financial fire-power is totally unknown to us peons.

Sales in 2019 have reduced the LTV by 1% here, 1% there, while, imo, asset devaluations have fallen by over 20% in the last year. From the big sales we know that £100 million reduces the LTV by a little over 1%. Suggesting that it would need over £1.5 billion to bring the overall LTV down to 50%, which is still high by any normal standards.

The company has watched the share price crater from £1.20 a year ago, to 80p before the half-year results in July, to 13.4 pence today, without any meaningful communication to the outside shareholders of any plans to steady the ship.

I'm left scratching my head, assuming that JW is talking to a consortium of investors, as well as the company's financiers, to rescue what is a beautiful collection of retail investments, but I could well be wrong. This has happened before! Many times!! Perhaps he's decided that this is just an investment that's gone bad and it's time to let the bankers and administrators sort it all out, and gorge themselves on hundreds of millions in fees. Maybe we'll find out next month.

Part 1.

EPG200, You ask if you've missed something? Without seeing your calculations, I don't see how Intu can "refinance some of the asset-specific debt . . back to lower LTV ratios of around 50%.". Some of these LTV's have to be at 65%-plus today. This requires Intu to pay down the loans to below 65%. I have gone a tad blue in the face since last summer trying to get the message though that Intu has no cash. That is "no cash" as in "fresh out of the readies", "skint", use whatever is your favourite expression for an empty wallet.

Since the first half of last year, the company has had negative cash flow after Debt Service, G&A Expenses and contracted capital expenditure. This is about to get rather worse because some of its' properties will have broken through their LTV ratios at December 31st and the lenders are entitled to request cash repayments to bring the loans back into balance. We should learn more about these obligations in the Annual Report, due out in mid-March.

Some shareholders seem to be taking solace at earlier mention in financial updates of references to "£500 million of undrawn facilities." I'm here to tell you that £500 million of undrawn Intu facilities, plus two quid, will get you a ride on a London bus. Nothing more. Nothing less. Those facilities were agreed long ago and, as many already know, banks are in the business of lending you an umbrella on a very sunny day in June. They do not lend umbrellas on a foul and stormy day in mid-winter. Those facilities will have "notwithstanding clauses" permitting the banks to back out at any time, prior to you withdrawing any money. It is not a contractual obligation by a bank to advance money on request by the borrower. More of a "Well, you pop in and see me when you need funds, and we'll have a chat about it then." In other words, it's really not worth the paper it's written on. It's the best that's going to happen, provided nothing goes wrong in the meantime. Much has gone wrong here.

The assets in the balance sheet were £8.3 billion at 30th June. The property debt was £4.9 billion. (There's another half-a-billion of sundry debt too). Lets assume the valuers come in at £7.5B to £7.0B, being a fall of 10% to 15%, which gives an overall LTV ratio of 65% to 70%. I'm ignoring the effect of the Spanish, Derby and other sundry sales because you must remember the rent has gone out the door. The company's gross income has fallen by over £30 million as a result.

That's £2.5 million a month and in the previous half year the GI fell by another £3 million a month thanks to Administrations and CVA's, which have quite possibly recurred with other tenants during the last half-year. That's another drop of 10 to 20% in the net rental income in the half-year just ended, which may been alleviated by relettings, but at how much of a reduced rent?

I see I'm out of space, so this comment will continue with Part 2.

Bullstop, Goodwill is an accounting fiction. It's simply the difference between the net tangible assets of a purchased company and the price paid. The net assets of Future are 4/5ths of Sweet FA, because they comprise computer software, internet websites and lots of pieces of paper, which are intrinsically worthless. The price that Future has paid is based on multiples of earnings, nothing to do with assets, or their values.

But the only way the accountants say they can balance the books is to create an asset, which they call goodwill. So naturally it shows as £218 million. I've often wondered why the CA's don't allow all companies to periodically revalue their assets, as they do with property companies, who have no goodwill on their books.

The reason for yesterday's big fall seems to be Questor's column in the DT, which originally tipped FUTR in early 2018, and has now decided it's a 'Sell'. Questor's tipster, Richard Power of Octopus Investments remains a convinced holder.

It claims that Mobile Nations, bought in March '19, has seen a 50% fall in website traffic during the past year. This appears to fly in the the face of last October's accelerated payout RNS to the vendors, who had already exceeded their earn-out target in the first six months of their financial year. They're due to get their extra cash and shares on the 20th of this month. Blondeamon, can you throw any light on this?

DT also says another acquisition, "Purch", has been written down by £40 million since purchase. I've gone through the RNS' since 2015 and can find no reference to this company, which might just be my lousy middle-aged eyesight! Can anyone else throw some light on 'Purch', please?

Thank you Sain, for this competition, and Vitabella for adding the Gold Cup leg of the double.

Using 01/07/19 as the baseline, I'll plump for a 15% drop in this month's accounts and the bottom of the market at 30 to 35% down, so that values in, say, 2024, will be roughly half of where they stood in the middle of 2018. The rents surely will be that far down, and that low level gives plenty of room for future growth in the (then much fewer) remaining really-prime centres, so justifying a reasonably low yield. (Says he optimistically).

What's on offer in the way of glittering prizes? A pint in the Guinea?