Introducing himself as the new Aggregate Holdings CEO, the man who Viceroy Research alleges was running the German Real Estate firm from the shadows for years, was now sitting under the bright lights of a press conference in Berlin and in plain sight. Those present were not only treated to a speech and slick slides, but also offered a tour around Quartier Heidestrasse, their best development asset. But Furst, perhaps the worst, was not on the itinerary of site visits.

Caner said he was invited to buy a 20% stake in Aggregate by the owner and his friend of over 20-years Gunther Walcher. While he greatly enjoyed working as an independent advisor and dealmaker, “I will now gladly move from the passenger seat into the driver's seat for one simple reason - I decided to become CEO to make a difference.”

A line we have oft heard from many an aspiring politician.

Caner in his presser then launched into full sales pitch mode:

“Together with our great partners, blue chip institutions, investors, and entrepreneurs with whom I have successfully worked on many deals in the past. I want to prove that even in challenging times - and we are in challenging times - this is just the start of challenging times for the entire industry, not just for us. We can create enormous value for all, including society. However, this is a hyper competitive industry, ladies, and gentlemen, in which most of the players know each other personally whenever someone wins. And luckily, most of the time I have been on the winning side, [and] someone else loses.”

Overcoming his shyness and hatred of the limelight, at times during his presentation Caner seemed to be channelling his inner Elon:

“We need people who take the risk and build. As such, one can say this is an industry that greatly rewards success. But brutally punishes failure. And while it's certainly not for the weak hearted, it's neither rocket science nor financial engineering over the edge. While all over this year, companies within Aggregate’s portfolio have gone through this sobering process already, many other players in our industry have not made this unpleasant but unavoidable experience yet.”

Investing in Aggregate was an unpleasant experience in the past year for many funds.

Bonds are in the mid-30s (price, not yield) with a potential cross-default if unable to find €285m in September to refinance a convertible bond at VIC Properties, its Portuguese subsidiary.

As 9fin’s Emmet McNally wrote after the release of Q1 22 earnings, its future is heavily reliant on the sale of Quartier Heidestrasse (QH) its Berlin development asset. Attempts to refinance at VIC Properties level suffered from macro headwinds, with ‘tough’ negotiations with financiers, leading to concerns that Aggregate would have to monetise QH, its prize asset, to meet the convertible put and other significant upcoming maturities. He concludes:

“Our take-away from earnings and the subsequent call is that there remains a very concerning refinancing risk for Aggregate. Progress over a steep maturity wall is not just contingent on the sale of QH - it is simply a non-starter without. That raises considerable execution risk and absolutely no margin for error. Other assets must also be offloaded, and even then, the situation still looks precarious.”

(If you are not a client and would like a copy of Emmet's report, please complete your details here.)

But despite the seemingly precarious situation, Caner remains upbeat:

“We are ambitious. We always aim high in terms of quality, scope, size, and margin. Second, we are results oriented. While this may appear random to some of you, I cannot stress this point enough because our focus on outcome rather than process on implementation and execution rather than theory may well be second to none.”

Management theorists always say focus on the process and the outcomes will look after themselves. But our Austrian friend — if you think Viceroy Research is correct — advised Aggregate on a number of interesting and peculiar implementations and executions over the years.

But Caner rightly pointed out that lawyers Hogan Lovells had investigated all the allegations and found no evidence to support any of them in their independent report — not published publicly — but reportedly available on request to investors. We would love a sneak peek, btw.

So far so good, he was keeping to the slick script. But as his 40 mins set was close to the end, the conference call got Trumpian as he took a swipe at short sellers:

“I have now learnt that there are some black sheeps (sic) which don't accept defeat. Instead, they try to get an advantage by spreading rumours, even with the help of fake whistle blowers……and set up defamation campaigns into this social media world. It's very simple and easy as we all know how to do this. I was witnessing this always in politics. You know, looking back years. But now we also have it in business.”

The ‘fake news’ was creating a big problem for society said Caner who complained that it was impossible to serve legal documents against his accusers. No day in court yet, then. Boo.

And then 40 mins in, it was finally time for Q&A — but unfortunately the company recording stops there, tantalisingly leaving us wanting more.

We’ve spoken to a number of funds/advisors in or looking at Adler but none were present.

If you were, 9fin would love to hear from you — contact us via the usual channels — please post your best QH development photos to team@9fin.com

Peach Punch; Adler Leaks Letter

As Caner outlined in his presentation, the destruction in value in real estate company valuations year-to-date has been severe:

Unfortunately, the names are left off, perhaps a mid-summer quiz for our readers. No prizes, we don’t know all the answers to the charts above.

One is likely to be Peach Property Group, the Switzerland-based property developer, with a large portfolio of rental properties, 27,400 residential units, primarily in secondary German cities.

As at 7 July, its shares were down 45% YTD, to CHF 34.68, giving a market capitalisation of CHF 582.4m (€588m). It issued a mandatory convertible bond in the summer of 2021, whose equity option is substantially out of the money, adding to its debt pile.

Last year, according to the company was a record year with its reported LTV falling from 57.5% in 2020 to 51.9% in 2021 and with net tangible assets rising by 20%. Despite talk of tight supply and structural shortages in the German rental market, vacancy rates are high compared to competitors, noted one distressed analyst.

Highly acquisitive over the years, Peach has recently issued secured debt to fund redemptions. Most notably using a €100m RCF raised in April to fund a €50m discounted tender for its €200m (outstanding amount) Feb 2023 SUNs. The layering of secured debt is credit negative for its 2025 SUNs whose prices held up well for most of this year, despite well publicised issues at peers, Adler and Aggregate, but finally dived in June and early July.

This week, it announced yet another dutch auction to buy yet another €50m of its February 2023s at between 90 and 94. Unfortunately Peach only reports half-yearly, so it will take some time for us to establish how badly hit they have been in 2022, and if they are one of Caner’s losers. The 30 August release date is already synched in our calendars (a neat 9fin function btw).

In recent editions of the Friday Workout we have mused whether Adler Real Estate bondholders should act now, given concerns over leakage to Adler Group level, citing a series of inter-company loans and property transactions between the two groups.

Adler RE is flush with cash after two portfolio sales to LEG Immobilen and KKR respectively, announced in Q4 21 at a cumulative value of €2.485bn. Most of the valuable yielding assets sit at subsidiary level, with the riskier and more contentious development project assets (as outlined in a series of short seller reports by Viceroy Research) at parent level.

As a result many funds and advisors watching had believed Adler RE bonds were structurally senior to those at Adler Group, with Adler RE bonds trading at a significant price premium.

Adler Group is the majority shareholder of Adler RE, with a share stake of 96.72%. But for over two years it has failed to consolidate it fully into its accounts, given its inability to execute a domination agreement. This limits the ability to move cash around the group and means that two boards remain in place. A squeeze-out of minority shareholders in Adler RE was launched in late June, but even if successful is likely to take several months.

On 17 May, Adler Group Chairman Stefan Kirsten faced investor questions about the ability of Adler RE to transfer cash to Adler Group. In total, €265.2m was transferred to Adler Group from Adler RE as a short-term loan, subsequently converted into a long-term loan. A supplementary update on 10 May, included a statement on an ‘upstream loan’ which Adler says was a liquidity transfer, similar to a cash pooling system.

A portfolio sale of 1,400 residential properties in Berlin to Adler RE for a consideration of around €275m appears to have been the trigger for a letter by a steering group of Adler RE bondholders, which reminded Adler RE directors of their fiduciary and legal responsibilities. It was sent on 30 June from their legal counsel Kirkland & Ellis (K&E), and has been seen by 9fin.

The letter was addressed to Adler RE’s directors with White & Case, who has represented both Adler RE and Adler Group on various transactions in the past, copied in via email. This is the third letter sent by the group. The first two did not elicit a response.

The committee were “dismayed to learn about the transaction announced” on 24 June, saying their letter is “another attempt to illustrate to the board of Adler RE the significant risk of personal civil and criminal liability which can arise in a case where liquidity is drained from a company for the benefit of third parties and to point out certain concerns and requests regarding compliance with the terms of the Adler RE Notes.”

The bondholders question the valuation of the portfolio and the “arm’s-length” nature of the transaction. There are concerns the loans and property transactions will result in significant cash leakage and severely impact the ability to repay €500m of Adler Real Estate SUNs next April.

Adler RE noteholders with ‘significant holdings’ have formed a steering committee to further engage with the company and to ensure noteholders’ “interests will be adequately taken into account going forward.”

Directors were sternly reminded of their duties to Adler RE as their sole consideration, despite many having board roles elsewhere within the wider group. “Executing a dual mandate is a complex undertaking and not without liability pitfalls, especially when one or both institutions are in crisis,” K&E write, urging them to seek independent legal advice.

The letter also highlights potential event of defaults under the bond covenants. It reminds directors of their duty to “take appropriate restructuring measures when required,” and warns of their personal liability if they fail to do so.

Adler Group said to 9fin that it did not wish to comment on the letter or on whether it plans to respond to the noteholders.

In our piece this week, we reveal the contents of the letter in detail, the series of events leading to it and examine some of the issues raised.

Non-subscribers, drop us a line for a copy (of the article).

SAS as a (debt) service

Chapter 11 has been used by airlines more than anyone else. Between 1978 and 2019, there were an incredible 100 airline bankruptcy filings in the US. The extra-territorial jurisdiction is useful when you have assets parked in multiple jurisdictions and contracts worldwide. In addition, the DIP financing tools available and automatic stay — while now available in more jurisdictions — they are well established in the US, giving greater certainty.

That said, the SAS (formerly Scandinavian Airline Services) filing this week is one of the more unusual. Owned by the three Scandinavian governments, it has had multiple capital injections and debt restructurings over the years. I no longer have access to my old shop, but from memory I call recall at least three during my 16-year tenure. Billions were spent to keep it airborne, each time promoted as the final solution to reach debt service sustainability.

In 2020, a SEK 14.25bn recapitalisation plan was announced, with SEK 6.6bn (including SEK 2.25bn debt equitisation) of equity and SEK 7.6bn of hybrid capital, resulting in SEK 12bn (€1.12bn) of liquidity injected into the Scandinavian airline. It was meant to be more than enough for SAS to ride out the pandemic, with an estimated 470-days of runway.

Last May, as Covid-19 carried on for longer than expected, SAS secured a further SEK 3bn credit line from its major shareholders, including the Danish and Swedish governments. Structured to comply with EU state aid rules, it was meant to provide yet another liquidity buffer.

But that wasn’t enough, and on 22/2/22 (oh my, that's a lot of 2s) the airline announced a SEK 7.5bn cost reduction programme and a debt for equity swap for all hybrid and senior unsecured debt instruments. It would be accompanied by a broader balance sheet restructuring and renegotiated leasing and aircraft financing contracts.

Moody’s estimates that SAS will have incurred between SEK 9.5bn and SEK 11.5bn of additional debt (including the hybrid debt from the recapitalization package) by the end October 2023, compared to 2019. “Coupled with a depressed EBITDA we expect SAS' gross adjusted Debt/EBITDA to range between 13x and 15x at the end of FYE October 2022.”

After the Feb announcement, It then took several months for the three Nordic governments to decide whether to provide further support, and if so, in what form.

Norway’s industry minister said at end-June, they would convert debt into equity under certain conditions; Denmark (22% stake) would write-off a portion of the debt and convert some into equity, plus commit to new cash; whereas Sweden (22% stake) would not provide any more cash support, despite approving a debt-for-equity swap.

The filing comes just days after wage talks with pilots broke down and a damaging strike ensued.

Under the plan, as well as the SEK 7.5bn of annual cost savings, SAS is seeking to raise another SEK 9.5bn of liquidity and convert SEK 20bn of debt into equity. As at end April, the group had SEK 29.6bn of net financial debt, including three debt instruments totalling SEK 5.4bn. The cash position at filing was SEK 7.6bn.

In addition, there is the question of renegotiating aircraft leases, which it says are significantly above market. It has 59 leased aircraft and another 33 wet-leased (apparently an aircraft with cockpit crew, but without cabin attendants — thanks CAA for the explanation).

The Chapter 11 is expected to last nine-to-12 months. There is a dedicated website for more information and access to the usual plethora of dockets. We will compile a QuickTake shortly, and 9fin’s resident aviation expert Laura Thompson lands back in 9fin towers next week.

Politics Reign in Spain

I met an advisor this week, a veteran of Spanish restructurings. We reminisced about one of the craziest restructurings I can remember — if you thought that a 22-year old Austrian whose only business experience was a failed call centre investment, could borrow €1.1bn from Credit Suisse to buy €1.3bn of former East German social housing (Cevdet Caner btw) — what about a former Sheffield family lawyer borrowing £1.6bn from RBS to buy the Santander HQ campus in Madrid?

Propinvest’s Glenn Maud (nicknamed Glenn Fraud by the hacks) Marme financing had a supporting cast which included, Derek Quinlan, the infamous Irish property investor, the reclusive Barclay Brothers, party loving property tycoon Robert Tchenguiz — and Aabar (via a claim on the Savoy Hotels Group) later become to embroiled in the 1MDB scandal and a certain Jho Lo the disgraced Malaysian investor. What a book that would make! Tom Burgis are you free?

Over a beer, the advisor then filled in the gaps between theory and practice, arguing that politics still reign in Spain restructurings. The expected cliff edge, with financial support from SEPI to expire at end June, is in practice much more nuanced, with agreements and documents open dated. But while SEPI last week said nada to Abengoa, it is not yet an Abengonna, as last minute interventions aplenty appeared this week, with the company appealing against a liquidation order. Hedge fund Sinclair Capital and RCP (technology partner) has made a late €200m offer and €300m of bank guarantees, with 97% of the debt being written off.

Steel company Celsa has the green light from SEPI to inject €550m, but will it get EU approval and who will benefit from the funds? As a condition of the SEPI funds, the debt burden must be halved. Creditors, many of which are hedge funds which bought into the debt at steep discounts are demanding the first €550m of operating revenues and 49% of the value generated until 2029, according to SteelOrbis. With most of the funds working alongside Deutsche Bank, Prime Minister Pedro Sanchez spoke to Deutsche Bank’s head to get them to back down.

In brief

Bra-vissimo: A splendid outcome for Dutch lingerie brand Hunkemöller. 9fin’s Lara Gibson says that direct lenders are mulling provide private credit after it was acquired by Netherlands-based sponsors Parcom and Opportunity Partners earlier this year.

Banks JPMorgan and ING provided a bridge facility to refi Hunkemöller’s loans following the acquisition and sources close to the deal said no long-term funding solution has been found yet given the troubled state of the European high yield and leveraged loan markets.

Prior to the acquisition, Hunkemöller’s debt structure included a €285 million term loan B, which was trading in the high-80s when the M&A process was announced in late March, a €80m second lien facility pre-placed with Apollo and a €70m RCF. The debt structure left Hunkemöller around 5x leveraged, based on an 2021 adjusted EBITDA of around €90m.

Previous sponsor Carlyle had optimistically hoped to sell at around 10x, but we think that the 6x achieved for Dutch retailers Hema in early 2022 is nearer to the mark.

Cardiovascular care: After months of discussions, GenesisCare, the Australia-Headquartered clinics operator finally secured a A$75m equity bridge via a one-year loan, with fellow shareholder China Resources willing to put in A$88m if needed. Despite the news, their loans continue to trade lower due to cash burn concerns and sharply rising leverage after a poor third quarter to end-March. Lenders are still awaiting news on the sale of its cardiovascular arm which is meant to bring in triple-digits and to be announced by end-June.

50 Sheds in Play: We wrote in early May that Keter, the resin-based garden products group is running out of time to refinance ahead of October 2023 maturities, after posting disappointing Q1 numbers. Bloomberg this week, cites sources familiar with the matter (but are they close?) saying that an A&E or private credit solution is being explored by sponsor BC Partners.

What we are reading/watching this week

It was difficult to concentrate on markets this week, politics was much more entertaining.

I’m in the camp that we need a caretaker manager - surely there is only one man for the job.

Economist Tim Ash is my go to read for what it happening in Turkey and Russia. His blog on the effects on the Russian Sanctions - Why, What, How, Where — is a great analysis of their effects.

The backlash against Crypto Currencies is well and truly underway, with Martin Wolf at the FT saying that they are not the new monetary system we need and the Reformed Broker makes a good stab at summarising the main issues it is facing, noting that everyone hates rules and regulations until it is too late, and its clear that the leverage on offer, over-clever products and the hidden linkages in the digital world and suggests that the SEC should regulate as securities.

At 9fin Towers we were debating the similarities to the explosion (and subsequent implosion) of structured products in 2006/07. This might be the equivalent of a CDO-squared moment?

But does this matter, as most commentators think that it will not cause wider financial contagion. Stablecoins — where the two worlds of digital and conventional finance meet is the most likely trigger — the equivalent of BNP Money Market funds ‘breaking the buck’ ahead of the GFC. Weil’s piece on this sums it up perfectly.

There will be opportunities too. Coinbase — is $6bn enough to get you through the crypto winter? A great piece from my US colleagues on surely the highest yielding BB-rated credit of the year so far. With one of my favourite subheads of the year so far, HODL or FODL?

Other top of the market products are also crashing.

SPACs went Splat — an entertaining podcast from my former colleague Ortenca Aliaj — SPACs your lot for this week, folks.