Adler - One down, two to go
All,
Please find our unchanged analysis here.
Of the three transactions under negotiation, the sale of the Northern Portfolio to LEG should have been the easiest. LEG are a strategic buyer, understand the assets, will be looking for a lower return than KKR and it doesn’t involve an entire going concern as in the case of Brack. Adler maintain their claim of receiving a sum of ~€800m net and that the proceeds will be used "primarily for deleveraging”.
Liquidity:
- The transaction enables Adler to meet its maturity profile if now it even has to.
- Closing this first sale also lends further credibility to the other two transactions.
- We still consider the Brack sale as highly likely, given LEG have already bought a considerable amount in the entity.
- Whether or not the Valero/KKR portfolio will also be sold may depend on necessity. From where we are sitting today, we think it will be necessary but if the sale of its construction portfolio goes more smoothly than planned, then Adler may be able to hold on to more of its assets. As such news on that portfolio may take longer.
Remaining Adler Real Estate:
- IF and when all three transactions materialise, Adler Real Estate will be reduced to a mere shadow of itself and may in fact not be viable to continue in all its structural complexity. Adler Group may decide to buy it out or to wind up large parts of it.
- We expect, however, the 26s or possibly a mix of the 26s and the 24s to remain in place, on account of their long maturities, offset in the case of the 26s relatively hefty 3% coupon.
Deleveraging:
- The exact definition of “deleveraging” is not clear to us.
- We assume it means redemption of maturing loans and bonds, but we wouldn’t be surprised if some of the cash were used to lubricate the unwind - or more likely the final conclusion of past property sales, which might avoid write-offs and therefore a further increase in leverage.
Positioning:
- We maintain a sub-scale position in the Consus 22s for 2.5% of NAV and a 5% position in the SUNs of 26% shareholder Aggregate.
- The Consus position is based on the disproportionate pain that a liquidation of this entity would cause to all stakeholders at a time when the company is sufficiently liquid to avoid it. Leverage at Consus is now limited and stands in no relation to the €2.5bn of assets beneath it. As a caveat, we recognise that much of the refinancing of Consus with ADO debt in the last 18 months has bypassed Consus AG and would therefore rank structurally p.p., if not sr. on many assets. But the relative size of the remaining Consus debt vs the overall capital stack, the liquidity just raised, and the valuation risk it would cause to all participants makes us confident that these convertibles will be repaid at the end of this year. We like the yield and would buy more if the bond was bigger.
Wolfgang
T: +44 203 744 7003