Adler - Generosity Now - Positioning
All,
Please find our not-yet-updated analysis here.
For all their fur, Adler bonds are rightly trading at a discount to the rest of the market. But that could change more quickly than we thought. Bondholders are close to signing a term sheet for a restructuring that could happen this side of September and offer the company clean accounts thereafter. Exactly what the deal is we do not know. We can only hope it is thoroughly comprehensive with a big haircut. Any stingy half-restructuring would only stymie the trading of the new instruments.
Investment Rationale:
- We continue to hold our 3% of NAV position in the New Money PIKs.
- We are furthermore buying another 3% of NAV in the €700m 2026s, the same bond we used to own, for 39c/€.
- In the current capital structure, the PIKs have been very much eating into the value of the ADJ bonds. Going forward we expect a more manageable capital structure that will allow Adler to re-enter the capital markets.
- Restructuring ASAP will preserve value within Adler and relieve the pressure to forcedly sell good (overvalued, but good) development assets in the market at rock-bottom prices.
- Not having seen the term sheet, the position is not without risk. There is a good chance the restructuring will end up significantly diverging from the scenario below. But economically we expect that the ADJ bonds will be the prime contributors of fresh cash to the situation and will be (insofar as they have contributed such fresh cash) the majority holders of the equity.
- As per the math below, we are getting ready to follow this investment with another 3% of NAV of fresh cash, of which we should receive approx. 1.5% back via our PIK position.
Restructuring Scenario:
- Not much is in the public domain yet, but we can imagine things and we do have a few snippets.
- The company spoke of improving its cash position. Adler does not need more cash for its operating business. We understand this to be a guarantee-like buffer to allow the business to roll its outstanding asset-level debt with more ease going forward and therefore to arrest its need for constant asset sales. We will do the math in the coming update.
- D/E swap: Creditors at least at ADJ would ideally take a very large haircut and take over the equity of some new TopCo to leave potential legal entanglements at the old entities behind them. Economically (mind the taxes) it should be all the same. So the more generous the debt forgiveness, the better now.
- The New Money PIK will have to accept a much lower coupon. To do that we imagine we will be offered some participation in the new equity and/or rather some of that fresh cash.
- To receive favourable votes throughout, we imagine everyone, the PIK and the ADJ bonds will be invited to chip in this fresh cash, which should receive the majority of the equity.
- If Adler were to hold a big war chest of cash - say €500m cash on its BS after the transaction and if the New Money were net takers of €500m in cash, then the ADJ’s would have to be braced for a fresh cash contribution of 1/3 of their face value or approx. double their investments.
- We think this math is at the cautious end of the spectrum.
- We should see further value corrections of 4% in the yielding portfolio and some €300m in the development portfolio.
- By our math (numbers to be updated) this puts the ADJ bonds anywhere between 60-80 c/€.
Happy to discuss,
Wolfgang
E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk