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Private Credit 

Emmet Mc Nally

I was, regrettably, on annual leave on 16 December when Aggregate released its surprise Q3 21 trading update. As you may have seen, our editor, Chris Haffenden, issued an update following the call outlining the key take-aways. 

Having had some more time to digest, we have produced a follow-up taking a closer look at some of the most noteworthy revelations and inferences from the call. These include: liquidity; Fürst; LTV ratios; the outlook and the VIC Properties refinancing. 

A brief bullet point summary is available below, followed by the full report. 

The S IMMO stake sale will not generate expected proceeds given repayment of associated debt

Seemingly liquid assets appear to have been restated as long-term assets; valuations of such assets are due scrutiny

Next twelve months liquidity coverage of 1.5x looks over-stated; we view liquidity as ~€60m short of requirements in the NTM period

No apparent downside factored into cost assumptions for the Build & Hold and Build & Sell debt funding projections

The €250m 5.5% 2024s issued by Aggregate in May are proving tough for Vivion to offload; Aggregate could be on the hook

LTV ratios at the Fürst development look alarmingly high without an ambitious value upside being achieved; current LTV is near 100%

Reported Q3 21 proforma LTV of 53.9% infers interesting moves in consolidated cash, assets and liabilities

The year-end LTV projection raises concerns about a maintenance covenant breach

A reiteration of a medium-term LTV target below 50% looks out-of-touch with reality

We believe the VIC Properties May 2022 convertibles refinancing cannot be entirely funded with debt, leaving one ostensible option 

There were many snippets of information to digest from management’s comments on the Q3 trading update call regarding liquidity. 

First and foremost, there was the revelation of outstanding debt to be repaid with proceeds from the company’s disposal of its S IMMO stake. As we mentioned in a previous report and in our liquidity deep-dive, we thought net proceeds from the asset sale - done at a loss - could have been just over €165m. This perspective has now changed upon learning of the related debt and, without knowing the quantum, we are left guessing as to whether the asset sale will have added much to liquidity resources or even any at all. Management noted on the Q3 trading update that there was a perception that the S IMMO stake was illiquid but the disposal proved this theory incorrect. 

While the stake has proven liquid (to note, we didn’t question its liquidity) the framing of its disposal in the context of ongoing non-core asset sales is a direct contradiction of the rationale upon acquisition. At the time, the company outlined that the transaction was “in line with Aggregate’s stated strategy of acquiring undervalued real estate assets privately or through the public markets”. That’s certainly a quick change of strategy - the stake was only acquired in January/February 2021, but now, alarmingly, it may prove much less of a useful mitigant to the current liquidity crises given the debt associated with the stake. 

A notable disclosure by management was just €74m of liquid financial assets remaining as of Q3 21, while the illiquid financial assets balance had increased to €532m from €440m as of Q2 21. This suggests the €180m of supposed liquid financial assets as of Q2 21 were not as readily convertible as expected. We say this because total financial assets only declined by €14m between Q2 and Q3 21, and we do not believe the company will have invested in longer-term illiquid assets during the quarter - the long-term financial asset balance rose by €92m sequentially while the short-term liquid asset balance dropped by €106m. By end-November, the liquid financial asset balance had dropped to €37m, suggesting some further sell-down during October and November. This is an alarming revelation in our minds and brings into question the valuation of the longer-term assets. It also sheds some light on why the company was reportedly approaching distressed funds for support in October at elevated rates.

The audio quality of the call was frustratingly poor, however we interpreted a comment from management which suggested that the poor performance of Adler stock in November had an impact on the financial assets balance as the company had to provide margin calls and its investments were therefore impacted. We do not know how to interpret this, however we do not rule out the possibility of Aggregate holding some Adler bonds. Otherwise, the Adler equity stake is not held in financial assets and any such margin call on the Adler stake should not directly affect valuations on other financial instruments held. We welcome any reader sharing their view if they interpreted this comment differently or has more clarity on its meaning. 

The company claims that liquidity needs of €181m between Q3 21 and Q3 22, outside of those already funded in the Build & Hold and Build & Sell segments, are covered by liquidity resources and income of €277m, providing 1.5x coverage. We question this, not least because an €18m dividend from the Adler stake is included even though the stake is subject to the option deal with Vonovia and is also collateral for a loan. There are also €37m of liquid securities as of November included, however as outlined above, we are cautious on the valuation and liquidity of these assets. Finally, the €148m of proceeds from asset sales is based on net asset value (NAV) after minorities.

Our take is that true liquidity falls €60m short of next twelve months (NTM) needs. This is based on a conservative set of assumptions, however Aggregate’s current circumstances merit such a perspective. If Vonovia purchases half of Aggregate’s Adler stake using its call option, dividends from Adler drop from €18m to €9m in our 9fin base-case. Interest income from loans of €30m is subject to default risk but we leave that figure unchanged. The same is true of €44m of short-term loan maturities on both fronts. We remove the entire €37m of liquid securities from our estimate, based on the apparent move from short-term to long-term financial assets of potentially up to half of the Q2 balance by Q3 21. Finally, proceeds from asset sales - the company has provided a €148m figure based on net asset values (NAV). 

Per this Corestate document, Aggregate Holdings held 3.42% of the 20.83% of Corestate shares ultimately owned and recently sold by Günther Walcher, while the rest was held by Aggregate sister funds with the same ultimate controller, according to management. If the stake was sold based on a market cap of around €325m (as at the beginning of December), the 3.42% stake would have generated just ~€11m of cash proceeds. We speculated before on what cash this would bring in for Aggregate but have re-assessed this based on management’s disclosure that the other funds holding the stake (i.e. Passivia Participations, etc.) are sister companies but not under Aggregate ownership or control. 

With such little value attributable to Aggregate’s Corestate stake, the implied NAV of the S IMMO stake is well below the acquisition price Aggregate paid. At a book value of €256m for the 10.8% stake in S IMMO, an NAV of €148m implies liabilities - or a margin loan on the stake, looked at it another way - of ~€108m. The company sold the stake above closing share price on 1 December and we therefore assume a price-per-share achieved of €21. This might have generated ~€165m of gross cash proceeds, which after the repayment of ~€108m of liabilities results in net cash proceeds of ~€60m from the sale of the stake in S IMMO. Combined with ~€10m generated from the 3.42% stake sale in Corestate Capital, this could generate net cash proceeds for the group of €70m rather than the €148m NAV cited by the company.

In total, we estimate ~€153m of potential liquidity resources as of Q3 21, vs the company’s cited figure of €277m. 

On the costs side, we note that the company excluded €434m of debt at assets held for sale with a WACD of 7% as of Q3 21 from its estimate of NTM cash needs. We are inclined to include this as we expect the disposal program for the eight-project asset base to run into Q1 22 at least. We note that Aggregate did not provide any specific update on the progress of these disposals in the Q3 trading update or call. When combined with €181m of cash needs by the company’s definition, there could be €211m of cash needs in the NTM period. Against €153m of income and potential liquid securities, this means the group could fall almost €60m short. 

Management has clearly attempted to reassure markets with the inclusion of this chart in the Q3 trading update, however with some justifiable adjustments, the take-away is that recent signals of the dire liquidity situation at Aggregate were accurately reflective. 

No downside room in project-level costs assumptions 

What we, or the company, have not considered in liquidity estimates is the potential for needs within Build & Hold and Build & Sell segments exceeding what has been raised in funding. Seemingly, QH, Fürst and VIC Properties are fully funded from a capex and interest reserve perspective. We covered before what cash there is at Fürst, while VIC Properties had €32m of balance sheet cash as of Q2 21 (per fins). From what we can deduce, there was ~€85m of cash at QH as of Q2 21, based on a total debt figure of ~€675m as of Q2 21 (disclosed in the company’s Q2 earnings presentation) and net debt at the asset of €590m as of Q2, per the Q3 trading update. VIC Properties’ development relies on the company continuing to sell and forward-sell assets to generate funding, while €85m of cash at QH seems way short of what is left to spend considering a €45m increase in net debt at the asset between Q2 and Q3 21 and construction completion moving from 51% to 57% over the same time period. 

Applying basic arithmetic, with 43% of construction left to complete and at €45m spend-per-6%, there is a little over €320m of cash needed to get the QH project to completion. Incidentally, total post-construction debt was expected to be €1.1-€1.2bn as of Q2 21 update. €675m of gross debt as of Q2 21 plus ~€365m of remaining development spend (i.e. €45m during Q3 21 and €320m thereafter) equates to ~€1.04bn of post-completion debt. Just as with Fürst, we would be inclined to include some, if not all, of this post-completion debt expectation in a current assessment of LTV considering the project is on track to complete in stages up to Q1 24 and there may have only been ~€40m of cash at the asset as of Q3 21 (€85m as of Q2 21 minus €45m capex spend in Q3 21). 

As a final note, we outlined in our deep-dive that we saw unrestricted cash as of Q2 21 at €50-€70m. We have now revised this to an estimate of unrestricted cash of €11m as of Q2 21. This is based on consolidated cash of €448m adjusted for €32m of cash at VIC Properties (per fins), €320m of cash at Fürst (€250m capex, €70m interest reserve) and ~€85m of cash at Quartier Heidestrasse (QH). Management would not be drawn on the liquidity position as of November or give any forward projections on the Q3 trading update call, noting only that there is a continuing focus on selling non-core assets and using funds raised to pay down debt.

As you may be aware, we spoke to Vivion investor relations (IR) recently about the Fürst acquisition and outlined what we had learned last week. Comments by Aggregate management on the Q3 21 trading update call were less than clear, but we outline our current perspective nonetheless below. 

Gross project debt as of issuance of €1.02bn is made up of three tranches of bonds at junior and senior level, per management. Of this, ~€250m was put into a capex reserve account and ~€70m went into an interest reserve account. If €70m is the total interest bill for the €1.02bn of debt, it translates into a WACD of ~6.9%. Management was very clear on the Q3 call that €220m of 2024 bonds were issued at the Aggregate Holding level as part of the Fürst debt. 

Aggregate issued a €250m privately placed 5.5% 2024 bond in May and noted in its Q2 21 financial report that “a portion” of this was used as part of the Fürst acquisition. Up until now, the nature of the €220m of financial assets that Vivion received as part of the Fürst consideration was not crystal clear to us, however we now know that it is these 2024 SUNs. When we spoke to Vivion IR, it was made clear to us that Vivion has no direct exposure to Aggregate through the transaction, however the SPV, or by contagion Aggregate, is liable to make up the difference between the nominal value of the bonds and what Vivion can achieve in on-selling them. 

This explains the inclusion of the following information in the 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.” With Aggregate being on the hook for the nominal amount (i.e. €220m) and the bonds indicated at ~64.5-mid as of writing (note: indicative pricing only), there is a potential liability of ~€74m at Aggregate if Vivion can only on-sell the bonds at this level. We do not know what agreement has been reached, if any, between Aggregate and Vivion, in the event Vivion is unable to on-sell the bonds. Management said on the call they were helping Vivion to find buyers. Were Vivion to hold some or all of the bonds to maturity, this may ease the liability burden but it could prove a difficult refinancing. What we do know is that Vivion IR outlined to us during our call that it expects the full consideration to be paid by June 2022. 

The structuring of the Fürst acquisition has never proven especially intuitive to us and revelations by Aggregate management on the Q3 trading update call have not changed our view. We still have a concern that the €485m of SPV bonds issued to Vivion, which incidentally appear to be senior to the Aggregate level SUNs, were structured in such a way that cash available to Aggregate to repay these bonds on a schedule running to June 2022 is contingent on the project reaching certain milestones. We otherwise cannot see why Aggregate would have asked Vivion for a postponement of a ~€50m consideration due in October, as per this Bloomberg report. 

Finally, there may also be some contingencies in place on Aggregate availing of the extra €250m of debt that it needs to get the project to completion, or with another perspective, to help fund the remaining cash consideration to Vivion. 

Aggregate owns 89.9% of the Fürst development and, as we outlined in our first trading update review, management declined to confirm the identity of the 10.1% minority owner citing potential confidentiality issues. There was some suggestion that the shareholding structure relates to real estate transfer taxes (RETTs) as the threshold for liability is above 89.9%. 

Project level LTV as of Q2 21 was around 66%, based on a market value of €1.06bn and net debt of €700m. At Aggregate’s ownership level of 89.9%, LTV as of Q2 21 rises to ~75.3%, based on market value. With €40m of capex spent on the project during Q3 21 and the next revaluation of the asset due to occur at year-end (i.e. asset not revalued as of Q3 21), we estimate net LTV per Aggregate’s ownership level as of Q3 21 was 77.7%. At completion and based on an 89.9% share of market value of €953m (i.e. 89.9% of €1.06bn Q2 21 market value), net LTV moves to just over 131%. This is based on €1.25bn of net debt after €250m of cash is spent on capex, ~€70m of cash is spent on interest and €250m of extra debt is secured. 

Based on Aggregate’s estimate as of Q2 21 of GDV upside to €2.5bn upon completion (vs. €1.6bn as of Q2), market value upside could rise to ~€2bn at completion from €1.1bn as of Q2. With an 89.9% share of this market value at completion and with €1.25bn of net debt, LTV at completion for Aggregate would be a staggering 69.5%. Project LTV at completion would be 62.5%, based on a market value of €2bn. With only €250m of capex due to be spent, an apparent market value upside expectation of ~€900m between Q2 21 and end-2023/early 2024 looks ambitious. 

Finally, project-level LTV excluding trapped or spoken-for cash as of Q2 21 at Fürst was effectively 100%. 

For any future determination of one’s own definition of LTV at Aggregate, we recommend adjusting the asset value of the Fürst development to Aggregate’s 89.9% ownership stake. We will similarly watch closely the trajectory of the project’s GDV and GAV appreciation as the development approaches completion. 

The company reported a proforma net LTV (i.e. removing assets and liabilities held for sale) of 53.9% as of Q3 21, up from 52.5% as of Q2 21. Including assets and liabilities held for sale, assuming the asset value of €619m did not change between Q2 and Q3 21 (Q3 figure unknown) and applying €434m of liabilities as of Q3 (provided by company), LTV was at 55.3% as of Q3 21 vs 54% in the prior quarter. 

Net debt as of Q3 21 was ~€4.06bn, a €275m sequential increase. This is before €434m of liabilities at assets held for sale which, if included, push net debt as of Q3 21 to ~€4.5bn from ~€4.2bn as of Q2 21. We know that the acquisition of the Ringbahnhöfe project was at least partially financed with a €130m senior secured bond arranged by Corestate Bank. Net debt also increased by €45m and €40m at QH and Fürst respectively as a result of capex spend. This gets us to €225m which is €50m short of the sequential change, however we deduce from reported LTV and asset values that consolidated cash increased by ~€95m sequentially in Q3 21, meaning implied gross debt was ~€370m higher as of Q3 21 vs Q2 21. 

What we cannot account for is an implied ~€105m sequential change in debt at Financial Real Estate & Other Assets (FREA) as of Q3 21, as we know the company secured a €250m Lombard Loan from Vonovia but will have used this to repay the margin loan on its Adler stake (reported as €220m). Perhaps other margin loans taken out against other equity stakes crystalised over Q3 21, but this is speculation on our part. 

We deduce from figures reported as of Q3 21 that there was a ~€95m sequential increase in consolidated cash to ~€545m. We note that the company sold its stakes in S IMMO and Corestate Capital in December (i.e. Q4 21). The net cash impact of the Lombard Loan and upfront cash element of the option agreement with Vonovia may have helped a little, however it won’t have been substantial. A derived sequential increase in gross debt of ~€370m in Q3 21 might explain some of the increase in cash (more below).

To explain our derivation of these implied numbers, net debt of €4.06bn and LTV of 53.9% as of Q3 21 (company-provided) implies total assets less cash and those held for sale of ~€7.53bn. We know that total assets were ~€8.7bn as of Q3 21 and if we assume none of the eight assets held for sale at a valuation of €619m as of Q2 21 were sold, then we can infer consolidated cash of ~€545m. 

Total assets look to have increased by ~€415m sequentially to ~€8.7bn, but we similarly cannot entirely account for this apparent change. We know that properties will not be revalued until year end, however inventory relating to the Prata development at VIC Properties may have increased. This aside, the ~€95m increase in cash accounts for some of the change while the Ringbahnhöfe project will have boosted the asset base. If total debt at the project is €130m, an LTV of just under 41% implies ~€320m of asset value which added to the €95m increase in cash would account for the gross asset value change. We computed a 41% LTV in order to get to the €415m sequential change in gross asset value. 

Year-end LTV projection casts doubt over covenant breach; medium-term target reiteration lacks substantiation

The company has outlined a net LTV expectation by year-end of between 60%-65% with the range dependent on the extent of the revaluation of Aggregate’s Adler stake. We presume there is also some variability on the extent of revaluation of properties/developments but management didn’t specifically allude to this on the Q3 trading update call. 

As of today (23 December) the 26.6% Adler stake is worth around ~€350m based on a share price of ~€11.10 as of writing. As of Q2 21, the Adler stake was likely booked at a valuation of €970m-€980m. All other things being equal (i.e. as of Q3 21 values), proforma net LTV would move to 58.8% by year-end were the Adler stake revalued to the share price as of time of writing. This is a clear indication, as we raised in our deep-dive, that certain transactions undertaken during Q3 and Q4 21 will be re-leveraging for the group - for example, the S IMMO stake sale. The company will surely be hoping for some decent valuation gains in its portfolio at year-end, suggesting the re-leveraging effect of transactions during Q3 and Q4 21 is not insignificant. 

We don’t quite see how the likely revaluation of the book value of the Adler stake at year-end informed an LTV range of 60%-65%, but note that there is a financial maintenance covenant on the company’s 2025 SUNs of consolidated net LTV at or below 65% (see here). This surprisingly wasn’t raised by management or analysts on the Q3 trading update call. In our view, the company may need to negotiate an easing of testing requirements or a temporary waiver of this covenant if it is to avoid a default. 

The company reiterated its near-term target of net LTV below 50% in the Q3 trading update, stating: “Aggregate continues to target its LTV at or below 50% in the medium-term, as the disposal of non-core assets will continue to bring down LTV and provide additional liquidity to the group.” We have several thoughts on this but in summary, we think this is beyond an ambitious target and lacks substantiation. 

The company will effectively be reliant on large gains in half-yearly portfolio revaluations to have a slim chance of meeting this target. We urge readers to bear in mind the following considerations in the context of the medium-term LTV target: i) net debt at Fürst will be ~€510m (~73%) higher at completion than as of Q3, per projections; ii) QH net debt as of Q3 was €635m and is targeted to rise to €1.1bn - €1.2bn by completion (i.e. a €465m - €565m increase); iii) the company plans to have fully funded financing implemented pre-construction of the Walter and Green Living projects; iv) construction of the Matinha and Pinheirinho developments at VIC Properties will require financing from sales and new project debt. This is not an exhaustive list but is certainly indicative of the challenges in achieving the medium-term target. 

We said before (see deep-dive) that we believe the disposal of the eight assets held for sale as of Q2 21 will be at best cash neutral and we stand by that assertion. This may be a conservative view, but LTV ratios quoted by Aggregate are proforma these disposals in any case. We certainly wouldn’t be banking on these disposals to de-leverage the balance sheet. Apart from that, what other so-called “non-core” assets does the company still hold that it wishes to divest? It has sold its S IMMO and Corestate stakes, the majority of its financial assets are loans to third and related parties (94% of Long-Term financial assets as of Q2 21) and we cannot see what else there is. There’s taking management comments and projections with a grain of salt; this dish requires much more than a light seasoning.

Aggregate’s 2025 SUNs have a ‘Limitation of Indebtedness’ covenant tested half-yearly. The covenant definition is indebtedness on a consolidated basis which does not exceed 65% of consolidated total assets. We interpret this as consolidated net LTV not exceeding 65%. As the covenant is tested at regular intervals regardless of whether Aggregate or subsidiaries incur debt, our 9fin legal team interprets this covenant as a “maintenance” rather than incurrence covenant. 

As outlined in our deep-dive on the VIC properties refinancing and from what we have said above, we cannot see how Aggregate would fund the redemption of the €250m of convertible bonds in May 2022 with debt at any level. Covenant headroom will likely already be at its limit by year-end, and the redemption premium on the bonds (~€285m) means any refinancing with new debt would be re-leveraging. 

The company has said that two main options are being explored: “The refinancing of the VIC convertible bond has been initiated with the focus on refinancing the bond at the VIC level where LTV based on appraised value of the assets was 47.2% at end Q3, in parallel with a review of potential asset sales which would provide an alternative financing route.” The LTV ratio at VIC Properties is incidental, in our view, as there is an LTV ceiling at Aggregate level because of the maintenance covenant mentioned above. 

As we have said before, any sale of an equity stake in the assets would need subsequent consideration in one’s definition of LTV ratios. For more on asset sale options, please request our deep-dive report by completing this form.

Aggregate Q3 21 Trading Update - Our Take

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