If you want a £100m loan from the government to keep flying, make sure your case is transparent and solid. Flybe’s pleas, sadly, seemed to fail on both scores.
The company’s collapse creates a headache for ministers since the airline operates almost 40% of UK domestic flights and employs more than 2,000 people, but it’s hard to save a company when the owners haven’t obviously dug deep themselves.
The list of unanswered questions about the loan proposal when it was first floated in January was long and there have few answers since. How much at-risk capital has the Connect consortium – Virgin Atlantic, Southend airport owner Stobart Air plus Cyrus Capital, a US hedge fund – injected since it bought the assets for a mere £2.8m a year ago?
The sale price reflected the need for heavy investment, but the main revelation in the past seven weeks has been the extent to which Flybe’s assets have been mortgaged. Any government loan needed to be on commercial terms to satisfy state-aid rules, but that’s a hard hurdle to clear if few assets are available to be used as security.
The spread of the coronavirus has clearly intensified commercial pressures on Flybe, but the government’s calculations also become messier. If the virus hits demand for flights until the peak summer, how could ministers be sure £100m would be enough?
An alternative approach was always available if Flybe failed: simply subsidise the routes that are deemed vital to regional connectivity and ensure new operators fill the gap. The test for the government is to show it has such a back-up plan in place.
Intu’s crushing debts leave it with few options
Intu’s plan B, it seems, is to whistle cheerfully and hope something turns up. That was not how the shopping centre group described its rejigged thinking after the failure to raise £1.3bn-plus to repair an horribly overstretched balance sheet. But the practical difference was hard to spot.
“I am pleased that a number of alternative options have presented themselves,” declared its chief executive, Matthew Roberts, while offering little detail about how “alternative capital structures and asset disposals” might ease shareholders’ pain.
A few centres could be flogged, though Intu would be reluctant to part with trophies such as the Trafford Centre near Manchester or Lakeside in Thurrock. Or part-stakes in centres could be sold, as Intu did in Derby last year. The hard part, though, is believing a distressed seller can attract whizzy offers.
There’s little point in shedding assets at way below their supposed value because the debt-to-asset ratio is the critical measure of a property group’s health. Intu’s ratio was 68% at the end of 2019; sub-40% would be advisable.
Last year’s big shopkeeping failures, in which Debenhams, Arcadia and Monsoon sought rent reductions via administration, haven’t been repeated this year, which is a plus. Coronavirus, though, is a definite negative when your business is attracting punters to congregate in enclosed spaces.
The company can try to chip away at debts of £4.5bn but, as Jefferies analyst Mike Prew put it, it’s now “intu the eye of the covenant storm”. Banking covenants are tested every six months and, if nothing else changes, Intu would be in breach if valuations fall 10% in the first half of 2020, a scenario that merely requires 2019’s rate of decline to be maintained.
Striving merely to stay alive is not entirely hopeless since the banks are also motivated to hope for a change in retail property weather and may waive covenants for a while. But Intu’s misadventure with debt has taken it to a desperate position.
The company owns nine of the top 20 shopping centres in the UK but the equity in this enterprise, after a Wednesday’s 41% slump in the share price to just 6.3p, is now worth less than £100m. Prew was a seller at 400p in 2015, so take his analysis seriously: “The shares are option money but the business has run out of options.”
The sun always shines at Legal & General
One can rely on Nigel Wilson, chief executive of Legal & General, for optimism. The coronavirus threat to the economy will pass; the second half of the year will be better than the first; so take the long view, he advised, alongside another slick set of results.
L&G’s model of “inclusive capitalism” – which essentially means investing in socially useful assets – has certainly coped with all recent challenges. Earnings per share have improved at a compound annual rate of 11% over the past nine years, and the dividend by 13%. Impressive.
L&G’s shares have been whacked as hard as the banks in the recent stock market slide and it’s not obvious why. Its core mix of investment management and annuities looks far less volatile.
