Some 54.7% of eligible 2025 noteholders have already provided irrevocable commitments to support the proposed changes.

The proposal for the 2024 notes is the same - a coupon uplift to 8.25%, but the maturity of the bond would also be extended until November 2025 from May 2024.

Kroll has been appointed as the tabulation agent and the consent solicitation memorandum is expected to be published by the company in May.

Aggregate said, unsurprisingly, that it expects its LTV to exceed 65% (the covenanted level), in light of declining property values: “The consent solicitation proposal comes as a deterioration in the real estate sector has led to reduced appraised values for the companies investment properties and properties under construction, as well as a market that is not conducive to asset sales or refinancing’s at attractive levels”.

Aggregate also noted the presence of senior secured and mezzanine-style debt (at Fuerst asset) in its capital structure, which ranks ahead of the 2024 and 2025 SUNs. Notably, it said that in the current environment of real estate market “dislocation”, that the value it expects would flow up to the SUNs from near-term asset disposals would be “very limited”. We discuss the implication of this for QH Track more below.

“Aggregate believes that these proposed amendments are strongly in the interests of the noteholders, through providing stability to the business to allow it to continue construction of its assets to be able to realise the value of completed developments when the market normalises.”

A distressed debt analyst following Aggregate said the “proposal looks horrible”, referring to the removal of the LTV covenant, deferral of interest and extension of maturity in exchange for 2.75% uplift in coupon. 

On the amendment of the definition of material subsidiary to 20% of total assets from 10% of total assets, the analyst speculated that perhaps this would allow the company to liquidate a subsidiary without it being an event of default, therefore allowing management to move assets around the group. We also consider this may have to do with its subsidiary VIC Properties (more on this below).

Aggregate did not respond in time for publication to questions on the rationale behind the request to change the definition of material subsidiary.

Who’s going to consent?

The threshold under the 2025 docs for a material amendment is 75% of participating voters (first vote subject to a 50% quorum). The company says it already has commitments from 54.7% of 2025 holders. A simple majority of participating voters is required for resolutions.

Aggregate initially issued €220m of the €250m notional 2024 SUNs to buy Fuerst asset from Vivion. Vivion subsequently returned the bonds to Aggregate as part of the purchase consideration for two Quartier Heidestrasse (QH) assets in September. It’s not clear if Aggregate cancelled these bonds and who owns the remaining €30m of the outstanding 2024 notes. The company did not respond to questions on this remaining stub. 

As for the 2025 notes, the analyst and traders previously told 9fin that they were struggling to find holders of the 2025 notes, as reported. Quirin PrivatBank, who acted as paying agent under the notes, told them that the bonds were not widely circulated when it was initially placed, with Aggregate instructing the bank who to sell the bond to. One American fund bought some of the notes from JPMorgan, they added.

Is the uptick enough?

The consent solicitation news has raised many questions and possible implications to ponder.

Firstly, the coupon uptick for the 2025s 2.75% seems cheap, even though the PIKing of coupons to maturity will have a beneficial compounding effect. Credit risk is clearly enormously elevated at Aggregate and a 9.625% PIK coupon seems a poor reflection of that. There is a very real refinancing risk in the bonds, evidently, and there is arguably much better available in other RE names at present.

That said, providing consent now avoids potential near-term insolvency and or an event of default (EoD). In either outcome, were Aggregate forced into a run-off or liquidation, recoveries for 2025 noteholders could be very poor considering the state of the market at present.

LTV decline not just down to property value

Aggregate’s admission that LTV will exceed its 65% maintenance covenant threshold is not surprising, however the reasons given are somewhat misleading. Realistically, the loss of 100% subsidiary VIC Properties to convertible bondholders will prove a big contributor as €1.14bn of goodwill asset value will be lost. 

The rest of the portfolio will likely experience a greater depreciation in value at year-end 2022 than peers given many assets are still in development and costs are soaring.

On development costs, Aggregate notes twice in its release that capex requirements for QH Track and Fuerst have increased due to “current market conditions for construction”, meaning additional financing is being sought to get the assets to completion. There is clearly execution risk here as so-called negotiations may prove tough given, in particular, the quality of the Fuerst asset, but in any case additional funding means higher LTV.

Material subs amendment raises questions

Aggregate’s attempt to redefine its material subsidiary definition in the 2025 notes from 10% of total assets to 20% of total assets raises some questions.

This may relate to developments at VIC, Aggregate’s Portuguese property developer that is soon set to be handed over the convertible bondholders.

Under the 2025s, an EoD is triggered by either Aggregate or a material subsidiary failing to fulfil payment obligations, or if either “applies for or institutes such proceedings or offers or makes an arrangement for the benefit of its creditors generally”. Failure to fund redemption of the VIC converts fits the failure to fulfil payment obligations bill, while the loss of the asset to creditors may fall under the umbrella of the second situation.

As the transaction, or “sale” as Aggregate calls it, is set to close in Q2 23, perhaps this is Aggregate attempting to avoid a potential EoD in advance.

Working out the arithmetic is a bit tricky. As of Q2 22, VIC gross assets of €1.882bn were 23.8% of total Aggregate Holdings assets. There is limited visibility on what has happened since then. Aggregate has sold assets and the goodwill on VIC may have been impaired, but presumably the company seeking to move the definition to 20% of total assets provides the requisite threshold.

If the amendment does not relate to VIC, there may be cause for concern as it could equate to Aggregate attempting to adjust the definition to either avoid triggering an EoD at another subsidiary or potentially begin some kind of liability management process at another asset.

Revelations raise serious implications for QH Track

The following assertion from the company has some worrying implications for important asset QH Track: “In the current environment of real estate market dislocation, Aggregate believes that the net value that would flow up to the 2025 Notes and 2024 Notes at the Aggregate Holdings S.A. level from near-term asset sales would be very limited.”

This is in the context of the company stopping any further asset sales.

LTV at QH as of Q2 22 was 58.2%. Since then the company has sold six out of seven segments of QH, leaving only QH Track, the biggest asset by some margin. The total achieved sales value of the six assets was around €1bn, meaning remaining value is likely just above €1bn, depending on the revaluation of QH Track as of December 2022.

That Aggregate says there would be limited net value attributable to the SUNs suggests there is substantial secured debt sitting at QH Track, and/or valuation indications from an attempted sale are well below book value as of Q2 22. In either case, the implication is a worrying one for bondholders, as there is now a reliance on a considerable improvement in market conditions to achieve a better sale valuation down the line.