A Luxury That Companies Can’t Afford in Brexit Britain

(Bloomberg Opinion) -- It’s an ominous sign for investors. The first working day of 2019 was marked by a British commercial property company pausing its buyback program.

Hammerson Plc had been repurchasing stock while simultaneously trying to reduce its borrowings. Now it turns out the developer can’t have its cake and eat it. The announcement sent Hammerson shares down as much as 4.8 percent to their lowest in almost a decade.

The company won’t be alone as the uncertainty over Brexit intensifies.

Commercial property will be at the epicenter of any economic turmoil. The valuation of Hammerson’s retail and workplace premises would be vulnerable. The market expects a shock: The stock trades at a 59 percent discount to the net value of its assets on one commonly used European metric.

Shareholders must be wondering if Hammerson is coming or going. First, it tried to buy Intu Properties Plc in 2017 — a deal that would have reversed its strategy of reducing its exposure to the U.K., and required leverage to increase — before it backtracked. Then, to placate shareholders, it said in July it would would step up disposals, hand back cash and cut borrowings. Less than six months later, it has now deprived the shares of one leg of support.

Nevertheless, suspending the buyback makes sense. The company faces legal restrictions on how it can direct its banks to repurchase shares ahead of its annual results in February. Losing the ability to micromanage that process is unhelpful when markets have been as volatile as they have of late. In any case, Britain’s febrile politics mean this is a time to be conserving cash.

It is too early to assume the suspension will become permanent. Hammerson is slightly ahead of its target. When the program was announced in July, the company expected disposal proceeds, net of capital expenditure, would be about 650 million pounds ($822 million) over 2018 and 2019. In the subsequent 12 months, the company expected to buy back 300 million pounds of shares. The landlord needed to cut roughly 200 million pounds of debt to meet its target of a mid 30s-percent loan-to-value ratio — assuming asset values held up.

Hammerson made decent progress on its disposals in 2018, providing some cushion against slippage this year. A downward revaluation of the portfolio would, however, require more debt-reduction to hit the LTV target, making it harder to resume the buyback. Hammerson might then have to cut capex to keep deleveraging while also returning cash to shareholders. Still, it should at least be able to make that decision calmly: The next big refinancing obligation isn’t due until 2022.

The pressure is on British boards to convince investors that share prices have fallen too far and borrowings are manageable. The poor take-up of Kier Group Plc’s recent rights offering shows shareholders can’t be relied on to stump up new equity when needed.

It’s entirely possible Hammerson will resume its repurchases. All it has proved so far is they are a luxury for companies surplus cash, and in the U.K. this year, that’s the one thing companies can’t have enough of to spare.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

©2019 Bloomberg L.P.