Adler - Interpretations, next steps and events
All,
Please find our unchanged analysis here.
The formalisation of Bafin’s investigation is perhaps not the most shocking news. We have been discussing implications for a while and it’s been a feature in our positioning decisions, but it’s worth reasoning through the structure of BAFIN's involvement to make sure we aren’t missing anything major. Meanwhile, Consus are delisting their shares just in time for the 9-month deadline from year-end.
BAFIN escalation:
- Since the international scandal around Enron required the regulator to have more sweeping powers, the German supervision and enforcement mechanism of financial statements and oversight has been organised in two steps: 1) Initial handling by a privately organised Deutsche Prüfstelle für Rechnungslegung (DPR or Financial Reporting Enforcement Panel FREP) and 2) Bafin with a Sovereign Audit Procedure. This is what has just formally begun.
- FREP - colloquially called the Balance Sheet Police - has however lost its sovereign mandate since January 2022. This has led to some indigestion in the process.
- For the second step to be formally taken, either a company has not complied with the requests of FREP, or the company does not agree with its findings, or Bafin have significant doubts about the process or result of the audit. The latter is the case here.
- Importantly, the escalation to Step 2 bestows Bafin with the following rights: Bafin can now: 1) order an audit, 2) publish such an order 3) order the hand-over of any information, 4) raid premisses, 5) request FREP’s argumentation, 6) determine faults in financial statements, 7) publish such determinations. In connection with the aforementioned powers, Bafin can also conduct interviews.
Next steps:
- In a first step Bafin have therefore ordered the audit of ARE’s 2022 financials, which seems in turn to have caused the ECB to sell its ADJ bonds.
- We then expect Bafin to order the remaining unsent emails that KPMG Forensic never received. Bafin might want to continue working with KPMG for whom they would have to blacken out any private data not deemed relevant in the investigation. Otherwise, we are not sure if Bafin have sufficient capabilities in-house, so this could take a while (there is always body leasing).
- Because the mere request of emails now seems narrow, we expect a raid on Adler’s premises in the immediate future. This has been a feature in our calendar for some time as we had assumed the second step had already been taken several weeks ago (no requirement of publication). It’s certainly coming now.
- We also expect the Frankfurt prosecutor to begin work in the same direction - helping with the legal side.
Interpretation:
- That Bafin are investigating is not news per se. What we are observing is rather the late formalisation of events that most have taken for granted at this stage.
- However, it is also an incremental confirmation that Bafin are aiming to use some of the above-listed powers, which at the least should provide for continued negative headlines over the summer.
- Adler “welcomes” Bafin’s decision. Of course, it doesn’t, but Kirsten knows that the only way forward now is to walk through this fire and as soon and comprehensively as possible.
- Chances are slimming considerably that Adler will have audited financials in April 2023 - three days after maturity of its £500m ARE23s. If BAFIN are beginning their work only now, then what opening balance sheet would any auditor base their work on and finish it in under a year?
- As a result, we have become increasingly convinced that ARE will have to seek a waiver from their bondholders before even the 23s come due.
Event more likely than not:
- If ARE have to ask for a waiver, so would ADJ. We don’t see group accounts being audited if a principal subsidiary isn’t.
- ARE may be able to avoid the situation if it can somehow carve out or - best case - sell the subsidiary in question (Gerresheimer) - which will be difficult as long as there is hope of selling Brack to LEG, but even so, we wonder if that would solve any problems. We have been asking on the last call if the asset is separately for sale now and the answer has been a very clear “no".
- If a group-wide waiver request cannot be avoided, we imagine the situation descends into chaos between the long- and short-dated bonds and possibly between entities. That will depend on ownership and x-ownership of the bonds then.
- On the one hand, bondholders are not in a strong position to withhold consent as the value destruction would be tremendous. On the other hand, if bondholders are organised and dare to enter a restructuring, they may prevent the 23s from escaping first.
- Among the ADJ bonds therefore the 27s are our favourite for a long position outright as we begin to consider a credit event becoming more likely than not.
Consus:
- The developer are pursuing their de-listing from the Frankfurt Stock Exchange just in time for the usual 9-month deadline from year-end. We have no further detail on the importance of the timing and so far are not specifically seeking it.
- We assume that the internal restructuring currently under preparation will leave but a shell behind, containing more risks than assets. But we do not agree with the idea of pushing Consus into insolvency to save on a little bit of administrative costs and the €120m convertible. In the scheme of a near €8bn debt stack, this would amount to handing Pandora’s box to an administrator. He will open it and make those problems Adler’s problems. Better to keep it closed as long as the cash lasts.
- Chances that LEG will exercise their option to buy ARE's shares of Brack have also deteriorated as LEG are now trading at a significant discount to NAV. Unless Gerresheimer make sudden progress on their planning application or LEG are ready to make a reputationally complex acquisition at dilutive prices, Adler will likely have to drop the price - in October.
- Negotiations with LEG may then drag on for a bit and Bafin starting its investigation only now also suggests that Adler will struggle to have a plan in place and the will to put it in front of bondholders as early as four weeks after that time. Liquidity will still be sufficient. Some assets will probably be sold and Management will rightfully consider it still has other options. For these reasons we see the Consus convertible getting paid in November.
Positioning:
- We remain long the Consus 22s for what has shrunk to a 1.8% position. We see this bond as having significant Nuke value in the structure and expect to receive par in November.
- We are not yet buying ourselves into the bonds at ARE or ADJ. We consider both bond clusters ultimately value-covered, but the process ahead with raids and LEG transactions possibly not materialising (at first) we are nimble enough to wait for a better entry. Larger accounts may use this period to gain volume.
- We see the Adler story change with growing organisation of bondholders. As and when it becomes clear that bondholders can prevent Adler from collapsing uncontrollably, the last two remaining questions should be those of a) fresh cash for Consus - licenses are running off and procrastination will destroy value and b) shareholder litigation, which could yet rank as senior unsecured claim against ADJ and therefore rank p.p. with ADJ SUNs.
Happy to discuss,
Wolfgang
E: wfelix@sarria.co.uk
T: +44 203 744 7003