Adler - How to put it in
All,
Please find a new version of our analysis here.
If it wasn’t a key consideration before, the early departure of LEG has put the topic of fresh cash firmly on the table. But now that the X-holders have engaged restructuring advisors, the time has come that we originally believed would set in around October. While that puts our existing position at somewhat higher risk than before, the results of our refreshed work have us changing some opinions and ultimately re-think our positioning two months ahead of plan. We desk-top value every asset in the structure, run an entity priority model and work out a likely plan for restructuring the debt.
Asset Values:
- The excel sheet allows you to play with the valuation assumptions, but for simplicity, we have slapped a 15% discount on all yielding assets. To be sure we would not be willing sellers at those prices. Germany has structural demand for these assets and they are among the highest quality around. But for now, while good companies trade at discounts of 25% to NAV, we’ll consider it.
- Consus has already taken a valuation correction of €1bn, but now that the company can no longer pursue the development of the vast majority of these assets, there is further room for correction. In particular, the large, long-dated, early-stage projects that also tend to be accounted for as Build2Own are in need of correction.
- We are however stopping short of crying foul. While there is no auditor to “make life difficult” for Adler, it is best to keep valuations high, so as to maximise headroom under any covenants until a bigger solution is found.
Entity Priority:
- Adler is not the most complex structure, but bonds have very weak protection from intra-group asset sales (and from many other things). So to think through the oncoming shell game between Adler, the ARE holders represented by K&E and the x-holders represented by Hengeler Müller and Houlihan, it is worthwhile being able to shift assets back and forth and keep track of changes in their valuation etc.
- Needless to say, the ARE bonds are covered under virtually any scenario.
- The ADO level bonds are less obviously covered, but that changes in particular with the value of the yielding assets.
The Plan:
- In our view, x-holders need to be ready to bring approx. €1bn in cash, less asset sales between now and then. The final value may be lower.
- Uses include: refinancing the €500m ARE 23s, refinancing the €102m NY law ADO Converts and dealing with hold-outs in the €300m NY law ARE Feb 23s. When that is done, it may be wise to fund Adler to the point where the company can hold on to its assets into better days.
- Contrary to our previous views, we now think a German StaRUG scheme would likely be too disruptive at Consus and destroy more value than necessary. Under the German SchVG (bond law) creditors pass a vote with 75% by value (issue by issue) and 25% in number of votes present in a second round. Except for the Convertibles, all ADO level bonds are under German law, making the structure at TopCo really simple.
- Ideally PJT find a plan that is also attractive for €600m ARE 26s bondholders so that perhaps all of Adler can be united under a new structure. But the long maturities on those bonds have us tempted to leave them in place and manage their covenants narrowly.
Positioning:
- We are still long and wrong the Consus 22s. In our opinion, even if Consus may not trigger ADO debt under their x-default language, the idea of putting Consus into insolvency amounts to far more risk and damage than the 3c/€ that €120m paper is worth to ADO bonds. We acknowledge that the earlier departure of LEG has given Adler more time than previously anticipated to find a solution to screw the Consus convert, but we don’t think it would be clever.
- We had been anticipating buying the bonds (ADO and ARE) around October, but now that the time plan has moved two months forward we will be discussing taking some positions across the structure. We like low Euro values and we see the ADO bonds in control.
Wolfgang