Last October, Aggregate announced that Vonovia and a consortium of banks had provided a €250m loan due in April 2023, secured on its entire 26.6% stake in Adler. The loan helped bail out Aggregate, which was facing margin calls on a JPMorgan loan secured against its Adler stake, resulting from a sharp drop in Adler’s share price following the release of a short-seller report from Viceroy Research. 

On 4 November, Vonovia gave more detail of the loan in an analyst presentation. It also entered into a call option agreement to buy a 13% stake in Adler from Aggregate at a significant discount to the Adler €45 NAV. Bloomberg reported that at the end of 2020 Vonovia had approached key Adler shareholders about a potential offer at €28 per share, but this was rejected by Aggregate as being too low. The call option agreement allowed it to buy in at half the price just under a year later. As we reported at the time, this effectively gave Vonovia a double-dip into Adler, reflective of Aggregate’s urgent need for cash.  

At the time, Vonovia had positioned itself as a stabilising force with wider ambitions to avoid a collapse in the German real estate sector as it consummated a jumbo merger with Deutsche Wohnen. It said:

“Finally and not to be underestimated: The shareholders and all other relevant stakeholders in the German resi sector have no interest in an unstable Adler.”

The full terms and conditions of the loan were not disclosed by either party. 

In its statement yesterday, Vonovia said that the shares had been pledged “as collateral for a loan that Vonovia had granted to Aggregate Holdings Invest on 7 October 2021 to replace a bank loan of Aggregate Holdings Invest.” By taking this step, Vonovia said it was “protecting itself against a loss of its receivable following a failure by Aggregate Holdings Invest to provide contractually agreed cash collateral.” 

It added “the enforcement of the pledge is a consequence of the credit exposure and was necessary to protect Vonovia's financial interests. Further decisions are not prejudiced by these measures — Vonovia retains all options, including the full or partial sale of the shares.”

Aggregate was quick to respond, saying the move was against a clear understanding between the parties that the loan covering the Adler shares was a strategic loan, and it was conducting a legal review of the implications. Aggregate said it didn’t believe that this specific event constitutes a cross-default on the 2025 bonds as the Adler shares were not held in a material subsidiary. 

Default triggers at issue

Under the 2025 bond docs, a "Material Subsidiary" means a Subsidiary of the Issuer whose total assets exceed 10% of the consolidated total assets of the Issuer, where the threshold shall be calculated on the basis of the last audited or, in case of half yearly accounts, unaudited financial statements of the Issuer in accordance with IFRS and in the last audited (if available) or (if unavailable) unaudited unconsolidated financial statements of the Subsidiary.

The Adler stake resides in Aggregate Holdings Invest S.A. and according to the Luxembourg register the subsidiary has total assets of €838m at FY 20 compared with a stated book value of the Adler Stake of €958m as at H1 21. At Aggregate Holdings total assets were listed at €8.28bn, suggesting that the 10% threshold could be satisfied under both calculations. 

In the 2025 bond documents, there is an event of default upon failure by the Issuer or a Material Subsidiary to fulfil payment obligations above a €100m threshold under financial indebtedness when due (including in the case of any acceleration). Other events of default include the Issuer or a Material Subsidiary having “been subjected to an insolvency proceeding” or making “an arrangement for the benefit of its creditors generally.” The bonds are German law-governed, and the German language version of the terms and conditions is binding.

There is no information available on the mechanism for Vonovia’s enforcement and if this was due to a failure to fulfil payment obligations. We assume the posting of cash collateral was triggered by the value of the Adler stake dropping below a specific amount or ratio. 

We would also question if the transfer of the shares following enforcement cures any potential events of default under the loan, and whether there are any ongoing obligations. We assume that the 20.5% stake transfer (from 26.6% total) was enough to satisfy the amount due under the loan terms. 

Other considerations are whether the crystallisation of the Adler shares would trigger a change in the reported LTV and potentially trip the maintenance covenant in the 2025s at 65%. This level is tested twice a year – at end-December and end-June. Based on the current Adler share price, the value of the 26.6% stake is €370m, compared to the H1 21 book value of €958m. This is a hard covenant which could trigger an event of default under the bonds if breached.

The company had previously said that the revaluation of the Adler stake at year-end 2021 would result in the LTV rising to 60-65%. The company is required to report its year-end LTV ratio within 180 days; it hasn’t yet communicated the year-end ratio level, or any covenant breach. 

There is a second maintenance covenant which relates to the Issuer holding “Tradeable Securities” (i.e. cash, cash equivalents and debt/equity securities listed, quoted or traded on any stock exchange or in any securities market) being at least 1.5x the annual coupon on its bonds, which after the sale of stakes in S IMMO and Corestate in the fourth quarter, and a sharp drop in other liquid securities in Q3, could lead to concerns that this could have been breached (more here). The only way this could be avoided in our view is if the Adler stake was designated as marketable, which would seem to apply, as the definition of tradable securities includes those listed on an exchange. 

It is probably too early to know on either test as Aggregate has 180 days before it has to disclose the covenant test results. Even if there was no breach, the inability of Aggregate to be able to post cash collateral does not reflect well on current liquidity. Following the loss of the share stake and the S IMMO and Corestate sales, it could be tough to meet the June 2022 test. However, the docs are ambiguous on the definition of cash, which could mean that restricted cash trapped at projects could also be included in the calculation. 

But Aggregate may run out of runway well before then. 

As reported, in addition to a €250m convertible bond putable in May at its VIC Properties subsidiary, it also faces payment obligations to Vivion over the Fürst acquisition. 

Is the wurst yet to come with Fürst?

We have held the view for some time that the consideration for the Fürst acquisition is fully funded, though access to the cash to fulfil the outstanding consideration may be contingent. We hold this view as €1.02bn of gross project debt at Fürst as of Q3 2021 implies the €485m of project SPV bonds that were granted to Vivion as part of the consideration were entirely drawn as of this time. This is not reflected in implied cash at the asset, derived from net debt of €700m (i.e. cash of €320m), suggesting to us that the cash raised from the €485m of SPV bonds not already paid to Vivion sits in an account to which access is potentially contingent. 

We say this because Bloomberg reported in November that Aggregate had asked Vivion for a postponement of a €50m portion of the consideration, a request that Vivion denied. If the acquisition funds (i.e. Fürst debt/cash) were readily available to Aggregate, we do not see why there would have been any need or incentive to make such a request. 

The real concern with Fürst that we believe bears consideration is the potential liability for Aggregate from the granting to Vivion of €220m of financial assets as part of the consideration. 

We have held the view for some time that some of these assets related to the €250m of 5.5% 2024 SUNs issued out of Aggregate Holdings in May 2021. Aggregate noted in its Q2 21 financial report that “a portion” of these notes were used as part of the Fürst acquisition. In its Q3 21 Aggregate trading update: “Aggregate has provided support to commitments given to the vendor of Fürst regarding the distribution to third parties of certain debt instruments held by the vendor related to Fürst.”

On the accompanying Q3 conference call, Aggregate management said they were helping Vivion management to find buyers, but with other publicly tradable bonds trading in the 60s in recent weeks and if the bonds only able to be on-sold at 50% of nominal value, the liability for Aggregate is up to €125m. 

In our view, it’s difficult to see there being a strong bid for the notes given the headwinds currently facing Aggregate. We do not know what has been agreed between Aggregate and Vivion to the event in which Vivion is unable to on-sell the bonds. 

Though there may be funding in place for the outstanding consideration, as we have said, we see an increasing likelihood that the end result with Fürst is that Vivion reclaims the asset via its full pledge over the shares of the SPV holding the asset. In such an event, according to our conversation with Vivion IR, there is no obligation on Vivion to return the cash consideration paid by Aggregate up to that point, however the likelihood is that there would be some mutual agreement between the two parties rather than an enforcement on the part of Vivion. 

VIC debt raise will not stick 

We opined in our Q3 21 earnings review that Aggregate would be unable to refinance the VIC Properties May 2022 convertibles entirely with debt, were holders to exercise a put option. This is although there is low project-level LTV at VIC and ostensible room to leverage asset value. 

This view and the refinancing itself is now more pertinent, given the loss of the Adler stake and the potential implications for Aggregate’s consolidated LTV ratio. As outlined above, maintenance covenant headroom was already going to be very tight at end-FY 21 and this will be exacerbated further during 1H 22 by the loss of the majority of the Adler stake. 

As far as we see it, the only option now is to sell a stake in the assets. The mechanics of doing so are not straightforward, however, and there is certainly execution risk to consider. 

Any sale of a stake in VIC Properties (100% owned) would need subsequent consideration when defining a true LTV at Aggregate. As the asset would likely remain consolidated, 100% of asset value would remain in the asset base for the purposes of calculating LTV ratios, although we would certainly be adjusting this value for the stake that Aggregate would retain following a possible partial sale.