If cash is king Unibail-Rodamco-Westfield might soon be a pauper. The owner of Westfield shopping malls is likely to see revenue evaporate as shuttered tenants withhold rent. Chief Executive Christophe Cuvillier may argue that lockdowns are temporary, but they are also accelerating a shift towards online shopping. The French group’s highly levered balance sheet makes it more vulnerable.
Unibail was under strain before the pandemic forced retailers across the developed world to close their doors. In February, the company shelved plans to develop a third flagship mall in London. But its 14 billion euro acquisition of Australia’s Westfield in 2018 remains its biggest headache. The deal saddled the business with debt. Gross borrowing was almost 25 billion euros at the end of 2019 and Unibail had a mere 489 million euros of cash – little more than last year’s net interest bill of 392 million euros. The company has since topped up its cash reserves by issuing bonds worth 2.8 billion euros, and has a 9.4 billion euro credit line. However, the danger is that it piles up more debt just to keep the lights on.
Tenants like Primark and Victoria’s Secret have already missed rent payments for April, and Unibail said last week that it had only collected around a fifth of the month’s rents. Falling property values are another potential headache. If its 63 billion euro portfolio takes a 35% hit, debt would rise to over 60% of assets, from 39% at the end of 2019. That would force the company to seek a waiver on debt covenants from its lenders.
Unibail’s market value has halved to 7 billion euros since the beginning of March, leaving it little scope to issue much fresh equity. That leaves asset disposals as a source of cash. The company owns prime real estate in American and European capital cities including New York’s World Trade Center and has managed to offload assets worth 4.8 billion euros since June 2018. But recent sales by rivals suggest valuations have collapsed.
Selling at depressed values would leave lasting scars. After all, Unibail also has to contend with the fact that confined costumers have become more used to buying goods online. In the company’s continental European stronghold, e-commerce currently accounts for 11% of sales, half the figure for the United Kingdom. If the lockdown speeds the online shift, Unibail’s problems will be anything but temporary.
(This is part of a series of insights from Breakingviews columnists examining how the Great Lockdown to halt Covid-19’s spread will affect business, finance, economies and markets.)