In Martin Scorcese’s classic gangster flick Goodfellas there’s a short segment of excellent financial advice.
A bar owner has found himself in debt. In his hour of need, he turns to the local mob boss. But while the cash injection is great at first, he has to make his monthly payments – whatever happens.
And when he can’t, well, the bar is torched as an insurance scam.
It’s probably not taught in business schools, but the ‘ F*ck you, pay me’ rationale of the Mob nicely explains why you should always be careful with how much debt you owe, whether as an individual or a company.
Lenders – whether loans sharks or corporates – ultimately have little patience if you can’t pay your loan back, whatever reason you have.
And that is sadly where shopping centre giant Intu finds itself today. Heavily indebted before Covid-19, the subsequent lockdown has proved to be the final catalyst that has sent the company into administration.
Starved of rent revenue, Intu asked its lenders for breathing space, but their patience finally ran out.
The main lesson to take from Intu is that while most good businesses should have some debt on their books, too much of the stuff will eventually kill you. Especially if it is £4.5 billion.
While other commercial landlords are on the whole in better shape to weather the Covid-19 induced storm, any expectation that the pain will ease in line with lockdown restrictions being relaxed should be abandoned.
The brutal truth is that things are likely only going to get worse in the third quarter.
Most businesses pay their second-quarter rent out of their first-quarter turnover and given most had a normal trading period prior to Covid-19, it’s easy to conclude that the next rent quarter day will be even worse as retailers will be using what will likely be tiny second-quarter turnovers thanks to the total lockdown.
Goodbody has some nifty charts breaking down rent collection data, which you can see below.
As we’ve often argued, the economic impact of commercial rents falling will ultimately be felt by the public thanks to many landlords being pension funds.
Goodbody agrees, noting: “The impact of a further quarter of weak rental payments is likely to have a wider, as of yet unquantified, impact on the economy. It is important to remember that the major institutional property investors (the landlords who are collecting the rent) are mainly pension funds, insurance funds and life assurance funds, be it directly (through property ownership) or indirectly (through REITs and PropCos).The weakened cash-flows will have an negative impact on their ability to pay policyholders and may change how institutional investors look at real estate.”