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German real estate operator Corestate has proposed that its bondholders take a 80% haircut in exchange for up to €33m from asset disposals, plus 50% shared upside in proceeds from repaid bridge loans and fees from discontinued mezzanine funds.

A group of bondholders holding over 50% of Corestate’s outstanding notes have countered with a proposal whereby they would receive 81.25% of the group’s equity in return for the 80% haircut. The bondholders are also willing to provide €25m of fresh money through new super senior notes to plug an expected liquidity gap.

“Logic says that if you do the haircut you need to be properly compensated,” said a source close to the bondholder group.

The group has a €200m 1.375% convertible senior bond maturing on 28 November 2022 and its €300m senior note due on 15 April 2023.

The company is working with Weil Gotshal and Rothschild. The ad hoc bondholder group is represented by Houlihan Lokey and Milbank.

According to the company presentation, the group initially made a proposal to the bondholders at the beginning of July after which the ad hoc group submitted several counter proposals.

On 18 October 2022, certain members of the ad hoc group entered into a confidentiality agreement with the company in order to conduct due diligence and negotiate the key terms of a financial restructuring of the notes. On the same date the ad hoc group provided an updated proposal to the company, which was contingent on the appointment of a Chief Restructuring Officer (CRO).

During the same week a group of certain potential investors (equity investors), some of which are shareholders of Corestate provided Corestate with binding equity commitment letters for a €45m injection, which also included terms for an amendment of the bonds.

After failing to reach an agreement with the company on 2 November, a few days later on 5 November 2022 the bondholders released the company’s proposal on German news agency pressetext after the company failed to upload it to their website to cleanse the information.

Corestate did not respond to requests for comment at time of publication.

The next steps in the process include an extraordinary general meeting on November 22 to clear the way for the issue of a maximum of 200 million new shares, according to Borsen Zeitung. This will be followed by a creditors' meeting set for 28 November which coincides with the maturity of the 2022 notes.

There is limited grace for the company if they fail to secure an agreement by 28 November. Under the bond documentation an event of default occurs if the issuer fails to pay principal or interest within seven days of the relevant due date.

In a liquidation scenario the company has estimated recoveries to creditors of just 18.6%.

Out of the €500m outstanding under the 2022 and 2023 SUNs €100m will be reinstated into new notes, to mature at least 60 months after the closing date of the restructuring. The new notes will pay 4.5% cash interest and will be subjected to a PIK toggle option in 2023.

The notes will receive mandatory prepayments from 35% of net proceeds from Giessen mall, Liver and Opportunity Fund, but these are capped at €33m. The notes will have share pledges over: CCG, Corestate Capital AG, Ginova AIF Sarl, plus pledges over relevant accounts and intercompany loans held / granted by CCHSA.

The company said that during the week of 17 October that “a group of certain potential investors, some of which are shareholders of Corestate, provided Corestate with binding equity commitment letters, which also included terms for an amendment of the Existing Notes.”

Under the plan, the equity investors will provide €45m of new money. Of which €5m will be provided as part of a share capital increase as a subscription price of €0.33 i.e. 46m of new shares and €30m will be provided as a mandatory convertible bond with a 4.5% coupon.

There will be a pro-forma equity split of CCHSA following conversion of mandatory convertible bond:

The €100m new OpCo notes will mature on 30 December 2026 and pay 4% cash and 4% PIK. The bonds will receive mandatory prepayments from 100% of net proceeds from Gießen mall, Liver, Echo, Opportunity Fund, bridge loans, contract assets and receivables related to fees from Stratosfunds.

In contrast, under the company plan, the upside is shared 50:50, plus bondholders will receive 35% of disposal proceeds, but these are capped at €33m.

Bondholders are also seeking an enhanced security package in comparison to the company plan, which mainly consists of share pledges and bank accounts. Their proposal also includes “guarantees from all material subsidiaries and CCHSA − First-ranking (or if not available, second-ranking) security charges over: Contract assets and receivables related to Stratos funds, bridge loans, Giessen mall, Corestate stakes in Opportunity Fund, Echo, Liver, other unencumbered assets (incl. associates and JVs, other financial instruments, non-current receivables, other real estate accounted for as inventories).”

The bonds have also asked for minimum EBITDA and minimum liquidity covenants to be inserted.

The bondholder group is hoping the company will recover to a point where the equity has value, according to the source close to the group. They are also hoping that asset disposal proceeds will be meaningful.

Full terms of the ad hoc group’s counter proposal are shown in the slide below:

The bondholders have also requested that the group appoint a CRO. They believe there is a conflict of interest with the CEO Stavros Efremidis being a 10% shareholder of the business. The bondholders feel he is not acting in the interests of the company and should be removed.

In December 2021, Efremidis along with other investors invested in the shares, which have since shed 90% of its value, according to the same source. Therefore they are pushing for the company proposal to get something out of their original deal.

In December the shares were quoted at €11 in December and are is now quoted at 80c, for a market cap of just €24m, as shown below:

On 1 December 2021, the company said that the board was aware that Efremidis and Karl Ehlerding were intending to acquire a stake in the company from Passiva Participations in an over the counter placement. After the sale, Efremidis was appointed Chairman of the board on 4 January 2022 and made CEO on 18 March.

Shareholder structure from the group’s website as of 23 June 2022:

The bonds are governed by German law, but the company is based in Luxembourg so it cannot use the German restructuring framework, according to the source close to the bonds.

On 25 October the 2022 bonds fell seven points to 14.5-mid and the 2023 bonds fell 1.5 points that day to 18.2 and have since fallen further to 16.2-mid today.

PIMCO is the largest holder of both the notes but it has significantly reduced its holdings since May. On 18 May, 9fin’s data showed PIMCO owning 25% of the convertibles and 33% of the 2023s. This has since dwindled to 6.7% of 2022s (as of 30 September 2022) and 7.7% of 2023s (as of 30 September 2022), according to 9fin’s latest holding data.

In June, Corestate Capital Holding S.A. (CCHSA) and a restructuring consulting firm  said they had conducted an indicative liquidation calculation based on the balance sheet as per 30 April 2022.

The implied recovery would be around 18.6% based on €114m net assets for distribution to CCHSA creditors, given €615m of insolvency claims and around €117m additional claims beyond Existing Notes “mainly being related to intra-group liabilities and loss absorption agreements, as well as (internal and external) letters of comfort.” The recovery analysis also implies zero recovery to existing shareholders of CCHSA.

The group’s asset disposals are primarily planned for 2024 and 2025, which the company says is reflecting the assumption of a recovery in a real estate market environment. Investments in new assets primarily relate to required co-investments (reflecting a RETT blocker share in attractive market segments.

Under the company plan, the expectation is that EBITDA will be negative until 2024, and will be just €19.2m in 2026. The KPI slide is reproduced below:

The group said it is targeting a medium term minimum free liquidity level of €30m, which in the absence of a financing solution cannot be provided in 2022 and some months in 2023. The group’s short term cash flow forecast envisages financing requirement from mid-December onwards to maintain a going concern opinion. €15m of additional liquidity is required by mid-December, with an additional €10m at closing of restructuring transaction. The cash flow planning assumes the payment of coupons in the calendar weeks 45 for the 2023 bond and 48 for the 2022 bond, but no further bond interest payments or repayments.

Corestate is publishing its nine-month results on 15 November 2022.

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