At 9fin our energies were devoted to getting users up to speed on the situation, producing an initial summary on the allegations, going more in-depth in last Friday’s workout, and then publishing a group capitalisation table and asset sale update. On Wednesday, 9fin’s Emmet McNally analysed the LEG transaction in his bitesized report: Adler-LEG Deal: What are the take-aways; where can LTV go?

Our aim is to produce quick bite-size updates, as given the fluidity of the situation, the value of waiting to produce a deep-dive a fortnight later is reduced. However, we will be releasing a Stressed QuickTake in the coming days which ties many of these pieces together.  

The more we look into Adler, the history, its operations, and transactions it becomes clear that the connections between various German Real Estate companies, and their major shareholders are key to its understanding. A whiteboard at 9fin towers resembles a scene from a Scandi Noir detective series, with a web of connections and transactions between Adler, Aggregate, Vinovia, Vivion, often with Corestate providing the financing, with most deals being cash-lite via share/receivables transactions. 

Adler’s long-dated bonds are now back below 5% yield after briefly touching 7%. News flow has quietened down in the past couple of days, with no apparent immediate trigger for bondholders. Expect some disparity between various bonds at the various entities as funds position themselves as they build their models and try to establish LTVs at the various levels. 

However, the bonds for their largest shareholder Aggregate Holdings, have failed to bounce, and are now trading at distressed levels, languishing in the mid 60s. This is despite news last Friday that it had entered into an 18-month call-option agreement with Vonovia - the German real-estate giant for 13% of its 26.6% Adler stake at €14 (Adler was trading at €12 at time of announcement) offering a low triple-digit million loan ‘working with involved banks’ at ‘prevailing market conditions.’ Market sources said it is widely known that Aggregate has faced demands on margin loans secured against its Adler stake.

Somewhat ominously, Vonovia 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.”

So why is Vonovia being so benevolent? 

One reason could be that it is trying to complete a mega-merger with Deutsche Wohnen and doesn’t want wider market disruption. But it is already over the 50% acceptances threshold, and in any event lower equity prices would help it to buy more. But widening RE finance spreads might impact the costs for a €19bn merger and/or banks willingness to finance. 

Does Vonovia have any direct exposure to Aggregate via previous transactions? Not that we can see from an initial investigation. But as we are finding out, there is a lot of connectivity in German RE. 

However, it is likely to be simpler than that. The call option allows them to buy a 13% stake in Adler at a significant discount to the Adler €45 NAV. Bloomberg disclosed this week that at the end of last year it had approached key Adler shareholders about a potential offer at €28 per share, but this was rejected by Aggregate as being too low. It now gets to buy in at half the price just under a year later. According to an advisor, the loan is likely to be secured on its assets, giving a double dip for Vonovia into Adler.

Evaluating Aggregate - Fürst in, Wurst out?

Another German RE company this week wanted to clarify its links and exposure to Aggregate. 

Eyebrows were raised when Vivion sold the iconic Fürstdevelopment in Berlin to Aggregate for €1.2bn, with rumours that it had to part vendor finance to get it over the line. The cash element was just €185m notes Wolfgang Felix from Sarria, who adds the consideration included €220m of marketable securities and a €485m participation in project financing attached to the development portion. The project finance exposure is now down to €362m, Vivion explained this week, seeking to reassure investors that the project bonds are tradeable and are secured by a first ranking mortgage and a share pledge over the asset SPV.  

So why all the concern about exposure to Aggregate? 

Some will explain that it is just a leveraged bet on Adler Group. But our initial take is that it is not so simple and it may have other issues. Time to look at the sum of the parts. 

Aggregate is controlled by Gunter Walcher who owns stakes in Adler Group and Corestate the real estate lender – via a 19.7% stake in Corestate jointly owned by Passiva Participations and Aggregate Holdings 2 (controlled by Walcher). According to Viceroy, Walcher is an old friend and associate of Cedvet Caner and a significant investor in Caner’s Level One Group. 

After it sold a majority stake in German RE developer Consus to Adler in December 2019 Aggregate received the 23.6% stake in Adler after exercising a call option, and expects to receive €12m to €14m per year in dividend payments. It also has a 10.79% stake in Austrian developer S IMMO. There are also securities, short-term loans and other investments.

But Adler Group and other assets are a minority of group NAV. There are significant Build and Hold, and Build to Sell businesses to consider (see below): 

Source: Q2 earnings presentation

In addition to the Fürst acquisition, the company has Walter and Green Living in Berlin - a commercial development, with a €384m market value and €1.3bn Gross Development value, with eight of the ten properties designated as held for sale.

But the main asset in Build and Hold is Quartier Heidestrasse, a large mixed-use project in Berlin. It acquired the land off-market in 2016. According to Aggregate, for FY19 “the market value of the development project Quartier Heidestrasse was EUR 981 million and the completion value EUR 2.1 billion (EUR 9,250/sqm with an average rent of EUR 27/sqm and a target multiple of 28.75).” It adds targeted completion value is €3.4bn, a 50% uplift when the properties are let and completed. Encouragingly nearly 50% of the office space has been pre-let with leading enterprise software firm SAP secured as an anchor tenant. 

The Build and Sell segment comprises VIC Properties, the largest real estate developer in Portugal, with two developments on Lisbon’s waterfront and a development just south of Lisbon. The projects are mostly residential with some hotels and commercial use and are expected to be completed in 2023 to 2025 and have a market value of €1.075bn (the valuation was recently raised from €825m) and a Gross Development Value of €2.76bn.

But until properties are built or sold, Aggregate’s earnings outside of fair value adjustments of investment properties are minimal (see below)

Similar to Adler, Aggregate is targeting an LTV of below 50%, but in the past six months the reported LTV has risen to 52.5% from 41.9% at FY 20. Worst still, it counts €1.1bn of goodwill and intangibles (mostly related to VIC properties) to reduce the LTV (otherwise it would be north of 60%) and is pro-forma assets held for sale, noted an advisor tracking the situation. 

Net debt at the end of Q2 increased to €3.79bn at end June 21 (from €1.99bn at FY 20). Operating cash flow was negative €311.7m in the first half, and dividends, loan income and income from Fürst, QH and from Portuguese property forward sales are around €80m, compared to interest income of around €110m, said the advisor.

While future cash flows from VIC Properties should be enough to cover interest costs in the medium term, in the short term the company is reliant on raising new financing via bond markets and/or refinancing bank debt at lower rates as phases are constructed and projects are de-risked. 

Aggregate did manage to issue another €230m of debt in August, via a €100m tap of its 2025 SUNs and a new €129.8m 2024 convertible. But at the time of issue the €500m 6.875% 2025 SUNs were around par, they are now at time of writing down at 65. 

In total there are just over €2bn of bank loans sitting ahead of the unsecured bonds, plus €250m of VIC Properties convertibles due in 2025 - structurally senior and are puttable by holders in May 2022 – if they fail to pay, this will cross default other Aggregate debt. It says that it is exploring a full range of options including VIC IPO/stake sale, refinancing, or increasing project level debt to deal with the converts.

With significant cash burn, the €448m of cash as at end-June is likely to diminish. Aggregate also claims €180m of liquid financial assets, plus the Adler and S IMMO stakes which it says are ‘additional liquid financial assets’. But if I was a bondholder, I would be concerned that they needed to borrow against their Adler stake so soon, and readily agree to be bailed out by Vonovia on such onerous terms.

9fin will be working on a deep dive in the coming weeks. We would also be interested in talking to investors, analysts and advisors for their views. 

French Exits

In our primer on French Insolvency in February we said that “Under new draft proposals creditor class composition will be more flexible and better reflect economic interests and ranking, with cross-class cram down now possible, including shareholders. But Mandat and Sauvegarde should retain their dominance and it remains to be seen if the proposed changes will significantly alter the mindset of courts and influence restructuring outcomes...” 

We added that the current Sauvegarde system was set up to protect companies and shareholders and was open to abuse, most notably via the option of a ten-year term out often at below market rates at a minimum of 5% principal per year, if there was no agreement with creditors. The most notable example was Groupe Rallye, whose creditors were not entitled to submit alternative plans nor vote as they were situated at a HoldCo which had no assets and less than 50 employees. 

Sources told 9fin at the time that Holding Companies would be assessed as part of the group structure and a repeat under the new law would not be possible. According to an excellent primer by lawyers Wilkie Farr on the new French Law which came into effect on 1 October “In circumstances where the plan is not approved by the requisite classes, including through a cross-class cram-down, the judge’s power to reschedule the debtor’s liabilities by up to ten years (known as “term-out”) is no longer available in safeguard proceedings but remains available in rehabilitation proceedings (subject to a minimum instalment of 10% after the fifth year) thereby providing debtors with stronger leverage in restructuring discussions.”

So, some encouragement here, albeit not absolute, you could still be termed out if Sauvegarde turns into redressement judiciaire. The new law does introduce a new version of the well-regarded sauvegarde accélérée used to good effect on Europcar’s restructuring. Another bugbear of creditors, class composition has been vastly improved, with provision for cross-class cramdown and super priority ranking for new money.

Was it too late for Comexposium lenders, did their late summer victory in the English Courts prove to be a hollow one? 

SVP and Attestor sought to use the English courts to gain information to help assist them in developing a counterproposal to a planned term-out, which will be considered by the Nanterre Commercial Court on 14 September. The funds own 55.9% of the bank debt after buying in after a filing for Sauvegarde, French insolvency protection, last September. Fellow committee members Hayfin and KKR are supportive of the legal claim. The funds have already offered to part and fully equitise their debt claims, but say the French events business failed to engage, with shareholders keen to remain whole and keep lenders at arm’s length.

It was disclosed in court that the funds (as part of the coordinating committee) would be invited to a meeting on 3 September with the Sauvegarde judge. This might allow the funds the opportunity to submit their debt for equity proposals (which were previously made conditional on obtaining necessary information) ahead of a 14 September hearing at which the company was seeking to term out the debt for 10-years.

But last week, the company announced it had exited Sauvegarde after the Nanterre commercial court had approved their exit plan. “Buoyed by the support of its shareholders and their €110M contribution, this procedure will have enabled Comexposium to get through the pandemic’s effects by allowing it to focus on preparing for the recovery and maintaining its leadership position,” it said.

Euphemistically, it added: “the various parties to the procedure praised Compexposium’s plans. The plans set out in particular the repayment terms for the group’s debt.” 

We assume a term out, after all the debt traded down five points after the announcement into the high 70’s. In the interest of accuracy and closure, If the funds managed to get a better outcome, please contact us at team@9fin.com.

Roll-on, Roll-off

Late yesterday afternoon Naviera Armas introduced their new management team to creditors. The hour-long conference call gave an expanded version of their restructuring proposal presentation, but didn’t give the opportunity for Q&A. 

Our Restructuring QuickTake outlines the plan for the Spanish Ferry group in more detail, but in brief a new €100m super senior interim bridge facility will be provided by SSN holders, and €70m in working capital facilities. Net leverage will reduce from 9.5x to 6.2x. 

Subsequently, Grimaldi completed on 19 July the purchase of Naviera’s routes on the Balearic Islands for €304.5m. Some of the Grimaldi transaction proceeds will further reduce the debt burden under the agreed restructuring, decreasing leverage by a further 1.1x to 5.1x, providing €51.5m of additional liquidity into the group. In return for provision of new money and writing off a portion of their SSN debt the equity distribution is now as follows:

In addition to securing majority equity ownership, governance has been improved, and more ship collateral added – with the vessels valued at €88m higher than the reinstated debt. 

However, ‘normalised’ EBITDA will fall from €100m to €65m after the disposal of the Balearic business. Naviera is forecasting 2023-2024 revenues to return to historical levels, with EBITDA improving to €70m - €80m with working capital changes close to zero from FY22. 

Our capitalisation table illustrating the restructuring is available here.

The restructuring is likely to become effective early next year, according to a source close to the situation. Creditors are being asked to sign-up to a Master Restructuring Agreement, with an application to a Spanish judge for Homologacion expected in the coming days with court sanction targeted for end-December. 

In brief

9fin doesn't like to crow about our research, but our Boparan report on 27 September proved to be a wake-up call, with bonds a further five-points lower since its release into the mid-80s. Boparan’s Chicken King continues to complain, saying inflation could hit double digits. 

“How can it be right that a whole chicken costs less than a pint of beer? You’re looking at a different world where the shopper pays more” argues owner Ranjit Singh Boparan who calls for “transparent, honest pricing…Government alone can’t fix this. We need to be honest with ourselves and work with our supply chains and customers – but it comes at a cost.”

Just over a week ago, Owen Sanderson suggested to me that with the sharp movement in Natural Gas prices, at least one commodity trader was likely to be caught out. On Monday a short-seller report landed in my inbox – titled Bon Voyage Gunvor – which according to traders pushed their 6.25% 2026 notes from par to 93/94. Bloomberg reported that the Cyprus based trader is facing margin calls of around $1bn, but the short seller report put the figure much higher at between $3.6bn and $6bn. 

We at 9fin don’t pretend other newswires and data providers don't exist. We will reference important events and revelations whenever we can. 

Chapeau to REDD Research for securing an interview with Eskom CEO Andre de Ruyter which included a number of scoops. 

De Ruyter talks about unbundling of the transmissions business, discussions for a one-off equity contribution from the South African Government to bridge the troubled Energy utilities debt reduction target, but creditor haircuts are not on the cards. Eskom is now the world’s largest Co2 emitter. 

Here is a teaser, please contact my former colleague, David Orbay-Graves for more.

Kudos to Reorg Research for securing an interview with Cedvet Caner yesterday. 

Questions were to be emailed in advance - I suspect many related to Adler and Aggregate. 

What we are reading this week

In a week where inflation fears turned into stagflation fears, many are now giving up on the idea of it being transitory. Fed Governor Bostic is saying it is a dirty word and has installed a swear box in his office. 

McKinsey has produced a great report to understand the employment conundrum emerging from the pandemic, with over 15m US workers quitting their jobs since April – a record. 

One for Quartz members, a good long-read on shipping’s role in supply chain shortages

A great story from Australia, where the regulator posted a message in a Telegram chat room to warn traders they may be breaking the law.In a post on Monday at 9.32am on a newly formed chat group called “Pump and Dump Organization,” an account named ASIC posted that “coordinated pumping of shares can be illegal”. One user wasn’t convinced claiming it was sent by someone “from another telegram group trying to spook people here. ASIC don’t send messages like this.” 

Someone put Untapped Hazy IPAs into a machine learning algo and asked it to create a new beer:

And finally, news of 9fin’s Series A financing broke this week, our aim is to improve on the UK’s poor world standing for tech successes