15.06.18

Snapshots has a serious case of World Cup fever along with 3.4bn people (almost half the world’s 7.6bn population) that are expected to watch this year’s tournament. The start of the World Cup also coincides with Eid celebrations for the world’s 1.8bn Muslims.

High Street Blues

The UK high street is suffering from a different kind of fever, which has profoundly affected the casual dining and retail sectors.  The causes are well known:  the lowest GDP growth in five years, higher business rates, stubbornly high inflation, uncertainty around Brexit and the structural move to online shopping.

Many household brand names have been affected:  Byron, Jamie’s Italian, Prezzo, Carluccio’s, Café Rouge, Maplin, New Look, Mothercare, House of Fraser, Debenhams and Poundland.

Some of these companies are entering into company voluntary arrangement (CVA) schemes which allow them to renegotiate or exit property leases without haircutting other creditors.  The remaining creditors are obviously very happy to vote in favour of these proposals.

There is anger from landlords who feel they are being treated unfairly versus other creditors.  Neighbouring tenants who are seeing rents reduced for competitors are also unhappy.  The retailer, Next, is reported to be trying to insert clauses into leases to match neighbouring rent reductions as a result of a CVA process.  Reforms are expected.

Importantly, under a CVA, existing management stay in control.  In a report by Colliers International titled “CVA – life saver or sticking plaster”, they observe that in the last ten years only 17% of retailers have survived a CVA without going into subsequent administration.  This seems obvious as comprehensive rescheduling of creditors, new management and new money are often required to turn a failing company around.

In the meantime, we continue to monitor this sector closely across the corporate and real estate teams.

Self-certified Models

The Bank of England and the PRA has warned again on the use of effective interest rate (EIR) modelling on 0% credit card portfolios.  This is a small part of the unsecured consumer market that Snapshots has mentioned previously.

EIR models rely on proprietary assumptions and are used by debt collectors, which are a small but fast growing segment of the credit market.  As creditors, lending against financial assets where the modelling assumptions are not transparent makes us wary.

Good luck.

Asif Godall
Co-Chief Investment Officer