Accentro – kicking the can.
All,
Please find our updated analysis here.
The rabbit Accentro pulled out of the hat Is already looking dog-eared. In return for a coupon uplift, a security package and redemptions from asset sales; bondholders offered the company an extra 3 years and crucially agreed not to look too closely at the details of who was really in charge when investment decisions were being made. However, we are sceptical as to how much benefit bondholders are getting. Ganiyev and management have bought themselves two years of breathing space and we think more drama is to come.
Investment considerations:
- We didn’t invest in Accentro SUNs before, because we simply didn’t believe in the valuations on the Investment portfolio. The risk was exacerbated by the SUNs maturing in February-23. The latter problem has been dealt with but not the valuation or rationale for buying rental assets.
- At 45c/€ the SUNs are not entirely unattractive now. The plan foresees a pay-down of 10c/€ and installs a double luxco holding net assets worth approx. €100m or more. From there, time will tell. We are sceptical about Accentro’s asset sales trajectory and assume we will be back in negotiations this time next year. We are also not fans of the largely unaltered governance structure and the opacity around the origins of the second portfolio and the junior financing arrangements.
- From a macro perspective, however, we think the German market is at a trough. The Adler crisis remains in full swing, Eastern Europe remains at war, the energy supply is not yet fully under control and inflation has not yet come down. But in particular, Berlin and Saxony had fundamental demand overhang before 1m Ukrainians arrived and the space does not yet reflect the widespread expectation that rates will rise more slowly now.
- In the end, however, we are already playing that same trade at Adler and Aggregate already and in both cases, we feel we have far more clarity on company history, governance and asset base. We are therefore skipping this opportunity.
Security is not perfect:
- The double Lux structure will cover about 27% of assets (around €150m). This is meant to grow as inventory assets are sold and new inventory is financed within the Luxco structure.
- Accentro has its feet to the fire in terms of the mandatory bond redemptions (€60m in 2023 and a further €104m in 2024 (funded from a €225m sale of Investment assets).
- Assuming maximum 30% leverage in the AssetCos under the luxco arrangement, value from that side of the company to the SSN Is equates to ca. 45 c/€ on today’s SUNs. We doubt bondholders will gladly pull the trigger for that.
- From Ganiyev’s perspective, however, his ability to generate any return for his equity lessens every time inventory assets are sold. He has little to lose in slowing the process down. An external CIO doesn’t stop this from happening.
- The equity remains in the hands of Ganiyev, although his margin loan is well underwater and the bank must be very uncomfortable with its position - in theory.
- The restructuring plan centres on the sale of a significant share of the Investment Portfolio by the end of 2024. Our valuation of that entire portfolio is closer to €225m, the same as the new SSN Is.
Bondholders are in charge but not in control:
- Bondholders will be happy that management is now forced to focus on reducing debt but there are plenty of holes and we will probably be back here in two years, if not early next year. On the positive side, the can lies now two years further down the road and given the state of the German RE market today, we are not expecting further downside from a macro perspective.
- The poor governance has not been fixed. Banning the company from spending money on the investment portfolio is a blunt instrument. Management may well be happy to offer this up in exchange for not having to delve too deeply into why they bought it in the first place.
Asset value is well hidden:
- Inventory; valued at €241m, management has been reducing the Inventory portfolio in 2022. From the cleansing presentation valuation did not change in Q4 with acquisitions matching sales proceeds. We have not seen any reason to dispute the Inventory valuations and the restructuring plan is based largely on allowing management to continue running this business albeit in a more transparent way.
- Investment portfolio; Investment here will be frozen as the bonds are outstanding. The book value is €360m but our valuation is closer to 225m a 35% discount. We are unconvinced about the East Germany portfolio and the lack of focus on whose idea it was to get involved in these assets and whom they bought them from worries us. We do not believe this portfolio will be able to generate €225m of sales in 2024.
I look forward to discussing this with you all.
Aengus
T: +44 203 744 7055