(Debtwire) Adler Group restructuring plan faces challenge from alternative proposal ahead of 24 February convening hearing

07 February 2023 | 16:42 GMT

An ad hoc group of Adler Group’s unsecured noteholders is putting forward an alternative proposal as the Germany-based real estate company gears up to implement its own deal via a UK restructuring plan, with the convening hearing pencilled in for 24 February.

The ad hoc group represents more than 34% of the company’s EUR 800m 2.25% senior unsecured 2029s. But Adler Group’s initial plan is still expected to be approved according to three investor sources. A 75% approval threshold in value is required for those voting in each class in any UK restructuring plan according to Debtwire legal analysis.

The ad hoc group’s alternative restructuring proposal was communicated on 31 January with the group’s members planning to vote against the company’s restructuring plan. The dissenting group is advised by Akin Gump, Gleiss Lutz and FTI Consulting.

A summary of the key terms of the opposition proposal included that new money would mature in July 2025 and all notes in June 2026. New money would also rank ahead of all the notes. There would also be optionality for investors to exit at a strike price as from net disposal proceeds there would be a right to tender at 60 cents offered first to the 2024 notes (assuming 2023 convertibles are addressed separately) with any excess then offered temporally to the 2025 notes then 2026 notes and so on, with the mechanism aimed at providing priority access to early-dated notes. If there was no tender or at the point where net proceeds exceed the total tendered bonds at 60 cents, then residual net proceeds would be applied pro rata to remaining bonds (post application of the tenders) at par.

The ad hoc group proposal is expected to provide “a longer runway” given maturities are deferred to 2026 and allow further time for the company to execute on asset sales. The tender also provides optionality to creditors and an exit opportunity for investors doubtful on underlying asset value and who may want to exit before their current maturities. Other more optimistic investors can recover par plus accrued interest in a market recovery scenario. The alternative proposal also argues that shorter-dated notes continue to be favoured given the optionality provided with the tender option open to all noteholders but over-subscription is compared to available net proceeds allocated first to the 2024s, then 2025s and so on temporally after. The alternative proposal argues that only once elections have been filled does the option pass to longer-dated notes. The alternative deal is also argued to be value accretive to shareholders.

Adler Group on 26 January launched its restructuring plan and issued a Practise Statement Letter, as reported. The company had signed a lock-up agreement with bondholders back on 25 November with financing commitments of up to EUR 937.5m planned to be provided to stabilize operations and the capital structure, as reported. The EUR 937.5m of senior secured loans would accrue at a 12.5% PIK rate and be issued at 1% OID with an allocation of Contingent Value Right instrument entitling holders to 25% of the equity value of Adler Group and mature in June 2025.

Additionally, the maturity of subsidiary Adler Real Estate EUR 300m 2.125% senior unsecured 2024 notes would be extended to 31 July 2025. The new inter-creditor agreement would mean new funding would rank first, with the 2024 notes, convertible notes and Schuldscheins would rank second and the remaining notes third, as reported.

Over 67% by value of senior unsecured noteholders had acceded to the lock-up agreement as of 26 January. These included around 78% of the 2024 notes, 87% of the 2025 notes, 64% of the January 2026 notes, 85% of the November 2026 notes, 58% of the 2027 notes and 53% of the 2029 notes.

“The company’s restructuring plan puts in fresh cash, but does not create a level playing field among the bonds. The 2023s are best positioned as they receive cash, the 2024s get a good deal in return for extending by only a year and all other bonds remain largely untouched,” independent special situations firm Sarria said. “So, the relative economics largely reflect the status quo.”

Sarria noted that the 2029s ad hoc group are suggesting that all bonds, including the 2024s, should mature in 2026. “This mimics the economics that would prevail in the alternative scenario that the deal fails,” Sarria said. “If this plan were to go ahead the 2024s would drop and the 2029s - oh wonder - would rise.”

“This reminds me of discussions in the pre-financial crisis where there were fights between senior and subordinated bondholders. Here all the debt will be pari-passu,” one buysider said. “The Akin Gump plan is to bring all the notes to mature in 2026, but why would shorter-dated noteholders accept this?”

High 75s (almost) all around

The approval threshold for a UK restructuring plan is 75% in value of those voting in each class according to Debtwire legal analysis. Unlike a traditional scheme of arrangement, there is no numerosity (i.e., headcount, test).

Adler proposes that plan creditors holding each series of the SUNs should form a separate class under the plan, and that separate meetings are held for each class as follows: (1) 2024 note holders; (2) 2025 note holders; (3) January 2026 note holders; (4) November 2026 note holders; (5) 2027 note holders; and (6) 2029 note holders.

Significantly, however, the plan tool facilitates cross-class cram down, meaning that – provided certain safeguards are met – the court can still sanction a plan despite the existence of one or more dissenting classes. So, a negative vote from the 2029s would not necessarily scupper the plan.

The safeguards are that the court is satisfied that, if the plan is sanctioned, none of the members of the dissenting class would be any worse off than they would be in the event of the relevant alternative (i.e., whatever the court considers would be most likely to occur in the absence of the plan, i.e. insolvency in Germany and other jurisdictions). Further, the plan must be agreed by 75% in value of a class who would receive a payment, or have a genuine economic interest in the company, in the event of the relevant alternative.

In order to proceed with the English restructuring plan, Adler substituted a wholly-owned English subsidiary, AGPS BondCo PLC, as principal debtor in respect of all obligations under the notes – an accepted method of establishing the necessary link with the English jurisdiction to use UK restructuring tools. Notably, Adler’s choice of the UK restructuring framework comes despite recent landmark German reforms that finally afforded Germany a fit-for-purpose restructuring regime, including the tools to complete quasi-consensual workouts on home turf outside of formal insolvency proceedings.

In its efforts to convince the English court to sign off the plan, Adler will produce opinions from independent legal experts that the plan is likely to be recognised and effective in Germany (given the SUNs and the parent company guarantees are governed by German law, and the group has substantial assets and operations in Germany) and in Luxembourg (owing to the parent being incorporated there).

Any challenges should normally be raised at the convening hearing, although any objections going to the overall fairness of the plan will be parked until the sanction stage. In terms of alternative proposals, it is established from case law relating to schemes of arrangement (which bear numerous similarities to restructuring plans, so case law is relevant to both processes) that the court simply has to be satisfied that the scheme is one that “an intelligent and honest man, acting in respect of his interests,” might reasonably approve. It does not mean that the court is required to form a view of whether the scheme is, in some general sense, or even in the court's own opinion, the 'fairest' or 'best' scheme.

The philosophy of law

Adler Group has been advised by PJT Partners as financial and White & Case LLP as legal advisor. A steering committee of noteholders (the SteerCo) has been advised by Houlihan Lokey as financial and Hengeler Mueller as legal advisor. The SteerCo held around 46% of the senior unsecured notes as of 26 January.

The company on 11 January announced it had secured the support of a sufficient majority of its noteholders on the implementation of certain amendments to its bond debt via the English restructuring plan process, as reported.

The company obtained support of holders of 78% of the nominal outstanding notes and 82% of total votes cast in the consent solicitation. As reported on 20 December 2022, the company announced the results of its consent solicitation. It failed to reach the 75% threshold for one series of notes (with just 54.9% of the nominal amount of 2029s voting in favour of the consent solicitation), and therefore the proposed changes will not be effective for any other series.

“The only way we can see the alternative plan succeed is on philosophical grounds - that a plan perhaps should mimic the alternative case and not the status quo,” Sarria said. “We are not sure and Akin Gump are good, but the judge would have to create a precedent for this.”

A second buysider agreed and expects the company’s plan to be approved.

Real-estate-sector credits face current operational challenges from rising rates, reduced consumer income and a fall in property values. Luxembourg-headquartered real estate company Grand City senior unsecured notes were downgraded to Ba3 by Moody’s on 1 February.

Positively, Adler Group subsidiary Brack Capital Properties sold a portfolio of residential assets to a joint venture between Tristan Capital Partners and Leubke & Kelber according to a December press report.

Adler Group subsidiary Adler Real Estate’s CCC- rated EUR 300m 2.125% senior unsecured 2024 are indicated at 92-mid with a 10.9% yield to worst on Markit. The bonds were down at 73.5-mid in mid-November 2022.

“Whatever the outcome of the initial plan we think the 2024s are good,” the first buysider said.

Adler Group had a 59.9% adjusted loan-to-value at 3Q22 according to Debtwire analyst calculations.<image001.png>

Adler Group, PJT Partners, White & Case, Houlihan Lokey, Hengeler Mueller, Akin Gump, Gleiss Lutz and FTI Consulting declined to comment.

by Adam Samoon with legal analysis by Dawn Grocock and capital structure by Manasi Kapre