Accentro – Edging closer
All,
Please find our updated analysis here.
Accentro is moving from kicking the can down the road to edging closer to a credible restructuring solution. Bondholders will take control of the equity, resolving the conflict between creditors and shareholders. Accentro will exit the Investment portfolio and focus on the Inventory business in future. Buyers will still want significant discounts to book value, but Accentro will be better able to negotiate. If this deal fails to complete, then management at Accentro is likely to push the button on insolvency, which would hurt everyone. The restructuring is expected to be completed in the fourth quarter of this year.
Investment Considerations:
- We are still not ready to take a position in Accentro, but the restructuring of the company will enhance the position of creditors. We will review taking a position once the restructuring plan is in place.
- The restructuring gives bondholders control over how Accentro uses cash received (through equity control) and a better recovery than the current trading price of 38c/€. We see the package trading at 43c/€ out of the box. If the restructuring fell apart (unlikely on our analysis) the downside would be at least 15 points as Accentro would enter insolvency.
- The German structure (representing 2/3rds of assets) meant that creditors were in a very weak position versus shareholders.
- Accentro is in dire straits, and the Ad Hoc committee has to lend money to pay coupons and cover operating expenses. If the Ad Hoc Bondholder group cannot execute this restructuring, insolvency is probable, and everyone gets a doughnut.
- The two previous A&E efforts failed because they left existing equity holders and management in charge. A plan that leaves bondholders in charge has a chance of being implemented.
- Asset sales will be critical to recoveries, but in the last 18 months, bids at a 30%discount to book value have been received. In its restructuring plan, management still expects bids at a near 20% discount to book value.
- We will monitor progress, and once asset sales emerge, we will review our attitude.
The Ad Hoc Bondholder group (AHBG) is paying to get rid of the current shareholders.
- Creditors have been in a weak position due to the structure of Accentro. With 2/3rds of the assets owned via a German holding company, shareholders have been able to dictate terms in the previous failed restructuring attempts. Bondholders had no option but to agree to the terms as the threat of liquidation would have wiped them out.
- This summer, with less than €5m in cash, Accentro needed €35m to pay coupons and to cover expenses through to the receipt of cash from asset sales.
- The controlling shareholder (who we understand to also be the effective holder of the €100m 2029 bond) was unwilling to provide liquidity. However, the shareholder could still have forced insolvency. Losing its equity and probably 100% of the value of the SUNs it held.
- Instead, they walk away with €55m in cash provided by the AHBG buying the 2029 SUNs at 55c/€. In return, the bondholders get control of the equity (89.9%).
Restructuring is comprehensive but painful:
- We expect the package to be worth 43c/€ immediately after restructuring. The fair value for the assets is closer to 81c/€, but Accentro will be seen as a forced seller, so there will be constant pressure on bids.
- Mandatory bond redemptions will incentivise the execution of asset sales and will provide recoveries for bondholders over time.
- The previous attempts to restructure the balance failed as management refused to sell assets at prices that leaked value from equity. Creditors will now own nearly 90% of the equity, resolving that conflict of interest; the flip side is that creditors will want to maximise revenue rather than forcing immediate disposals.
- New money of €35m will be provided (initially by the Ad Hoc group. The additional cash is small, as >€100m in asset sale proceeds are expected by December. The new money will fund the payment of coupons and operating costs. Accentro currently has less than €4m in cash
- The sole holder of the €100m 2029 bond will sell to the Ad Hoc committee at 59c/€.
- The Ad Hoc bondholder group will control 62% of the equity:
Investment portfolio sale proceeds are crucial:
- The Investment portfolio is to be sold over the next two years. The portfolio is valued at €320m by the company, Sarria’s valuation is €277m.
- The first €100m will come from the sale of an office and hotel complex in Berlin and is expected by the end of 2024. We have not applied a discount here as the sales process is almost certainly well advanced.
- We have applied a 20% discount to the rest of the Investment portfolio. In the cleansing presentation, management admitted that bids were being made at 30% discounts to book, as opportunistic buyers saw a forced seller. Accentro does not expect that issue to go away, and we agree.
- The Eastern assets (dilapidated residential apartments in Halle and Gera) are in the portfolio at €87m (Sarria estimate). We expect this will be the most challenging part of the portfolio to sell.
- The remaining assets are in Berlin (€65m), Essen/Duisburg (€45m), and Seeland/Aschersleben €21m.
- The Seeland/Aschersleben assets are northwest of Leipzig, but we do not believe they are in anything like the state of the Halle and Gera assets. Still, these may be more challenging to sell at book value.
Inventory will have to turn over faster:
- Turnover of inventory assets has always been slower than expected at Accentro. Getting possession of apartments to refurbish and sell takes time, as residents have little incentive to vacate.
- Accentro values this portfolio at €200m, Sarria has applied a discount of 17% to the portfolio and values it at €165m. The company will have to sell buildings as opposed to condominiums as it will not have the luxury of waiting for possession of individual apartments.
- The plan is for an Inventory business with a Gross Asset Value of €95m (by the end of 2028) and debt of €45m. How this will emerge is unclear, but creditors will be in charge of the process.
I look forward to discussing this with you all.
Aengus
T: +44 203 744 7055