Adler/Aggregate/Corestate/Accentro - KPMG and the German Real Estate Domino
All,
Please find our unchanged analysis on Adler here.
Please find our unchanged analysis on Aggregate here.
Please find our unchanged analysis on Accentro here.
Please find our unchanged analysis on Vivion here.
As we are headed for a set of major events starting this weekend with KPMG’s Special Audit, it is perhaps worth summarising our view, our risk assessment and ultimately our positioning in the situation at Adler and in its vicinity. KPMG have already framed the scope of findings in a recent preliminary release and their substantiation in the final version, along with outcomes of Bafin’s balance sheet review could trigger the dreaded launch of proceedings from the state attorney etc. However, implications from this report could have consequences for “ elated parties" and quite possibly the "related parties of related parties".
KPMG Report:
- We think it’ll be fine -ish. The Frankfurt/Hessen State Attorney’s office has been closely monitoring the special audit of Adler balances and - nothing. While the KPMG report is not yet out, we would have expected the state attorney to commence more visible action already. For the process to take such a sequential form, we expect the auditor’s findings to be “marginal" enough to act with caution - also with a view to implied signalling to public shareholders. This is very much only our own view and we could be wrong, but it is one of the reasons we are positioned long at various levels in this cluster.
- We do not believe the report will actually be published in its entirety on Friday. Rather, we expect Adler to make publicly available only certain sections of it and promptly. Those should be the key sections however - in theory.
- Adler: KPMG already announced some weeks ago that their report would find that Adler did not report related party transactions as such. The aggregate damage to Adler from these and other findings however would not breach Adler covenants, which seems to imply total damage of less than €1bn. We had previously estimated some €600m and see no reason to change that estimate.
- Aggregate: Key to the KPMG report will be findings surrounding the position of Cevdet Caner, who holds no formal position at Aggregate and who from our position is not required to do so. We see little risk to Aggregate as a result of that, but understand the risk to primarily surround Adler Directors at the time.
- Aggregate: Also key will be the circumstances under which Adler (was) bought (by) ADO as well as the acquisitions of the various Consus stakes from Aggregate. In particular the sale of Consus could have consequences for Aggregate as well as former directors of ADO. We imagine that the refinancings of VIC and the Fürst are somewhat subject to findings in the report. So publication of the sections relevant to Aggregate should be key for Aggregate (if however positive). We expect Aggregate and Caner to still hold sufficient shares in Adler to press for adequate disclosure in case this becomes an issue. We are mindful however, that Cevdet Caner does not only have friends. Whatever the content of the report, there may be forces at work to delay the report in an effort to put pressure on him / put him out of business - yes, even in Germany.
Aggregate - VIC Put:
- Ahead of May 28th, Aggregate have received Optional Put Excercise Notices for over €195m, €5m shy of a threshold allowing Aggregate to redeem the remaining outstanding bonds. Aggregate expect to receive those additional €5m exercise notices as it is still early days in the process.
- Subject to the incremental €5m (certain) and receipt of financing (less certain), Aggregate have stated their intention to refinance the entire issue. While this sounds encouraging, we very much expect all of the VIC bonds to serve notice, so that any further redemption becomes marginal.
- It then only comes down to financing, which we understand is still not secured to this date.
Aggregate - VIC Financing not yet secured:
- Because it’s been hard to find investors: We think a solution is likely that involves some fresh cash from the shareholder, which Aggregate may now have just about sufficient of. We have seen the company and its sister companies sell stakes in Corestate and a London hotel lately, as well as upstream incremental loan proceeds from QH and besides paying interest, clearly, none of it was used to post more collateral on the Adler margin loan. But because we do not know how leveraged each of these assets was in the first place, we cannot actually compute the liquidity they have raised. Aggregate, meanwhile, are looking to raise additional leverage in this transaction as about everyone can agree that the Portuguese operation could use more cash to unlock value.
- Because it’s backed up behind revelations expected in the KPMG report: Across German RE, there is not a bid in the market for anything related to Adler these days, as everyone is looking forward to the KPMG report to be released on Friday. This report primarily concerns Adler, but as its most contentious points related to transactions with "related parties”, those related parties and parties related to the related parties are all together off-limits for the majority of investors. Aggregate are/were a very closely related party.
- Because it’s subject to receiving notice for another €5m: This would be a technical point, which would surely have been communicated as such if otherwise the financing were secured.
Aggregate / Vivion - Fürst refinancing:
- As in the VIC refinancing, we expect investors to wait for the KPMG report before committing capital again, even if this would be at the most sr. secured level of a trophy asset.
- We do not consider it in Vivion’s interest to re-take control of the Fürst from Aggregate, only to then be chased by their lawyers, or worse - administrators. While Luxembourg law would allow Vivion to hold on to the proceeds from a second sale of the assets to a third party, German law would require these be paid to Aggregate. The relevant vehicle on which Vivion can foreclose is in Luxembourg, but contracts are under German law.
- Subject to the KPMG report, Aggregate should find it easier to replace Vivion as lender and Vivion in turn would do well in our opinion to give Aggregate more time for a smooth transition - for a premium we expect. Conversely, we suspect that the reason this has not happened already, is that it should keep its options open in the event the KPMG report turns out insurmountable for Aggregate. Then it would be best to foreclose.
Adler - Impairment:
- As per previous notes, we see Adler as fundamentally dramatically undervalued. The ADO portfolio is a prime asset and the sale of that portfolio should largely leave behind an unleveraged construction business that should be worth approx. €17 per share.
- As per above, we interpret KPMG’s interim’s disclosure as implying a value correction of less than €1bn on the grounds that above that value we think that Adler would be breaching its leverage covenants. This figure, which we estimate to be smaller, would include other mark to market corrections that have become necessary during the pandemic. So not all of it would be a “damage” arising from “fraudulent” transactions that shareholders could point to.
Adler - Class Action:
- Class action law suits are relatively new to Germany and are less common than in the Anglo Saxon world. Without an event of default, it should become difficult to garner support. Moreover, shareholders in this case would need to point to a clear link between damage identified in an enquiry and loss of value in their shares. Where the short seller reports have been vague, that could be difficult and the devil tends to be in the detail. Without a shareholder class action being launched / successful, we do not see an insolvency scenario for Adler.
Corestate (AFS / Bank):
- The former financing arm of Aggregate has been at the centre of many of the transactions that have greased the wheels of the cash-poor, debt-laden group of companies that form the focus of investigations.
- Since Stavros et al. bought out Aggregate’s stake last year, the former DB/Aggregate team that managed the credit bank has been replaced. Reasons may have included 1) poor performance of loans during the Pandemic, 2) proximity to Adler/Aggregate and therefore a move to distance Corestate from that cluster / move the company out of harm’s way and prepare for refinancing, 3) internal investigations at Corestate finding aggressive interpretations of disclosure rules in line with Adler ommissions. Options one and two seem almost certain. Option three is speculation.
(1) Poor performance is likely, because according to Sebastian Ernst, Corestate’s “USP” was that it could write Mezz loans faster than others and charge only PIK. If this does not sound brave enough, Corestate then wrapped those loans into interest bearing notes. So, without too many profitable exits in 2021, how can the notes pay interest? The fund management business makes up the majority of the income underpinning Corestate’s own financing.
(2) Corestate Bank (formerly: Aggregate Financial Services) was the main financing vehicle supporting Consus when it was sold to Adler. Since then ADO bondholders have picked up that tab more cheaply and Corestate profess to have only minimal exposure to either Aggregate or Adler, but with disclosure interpreted as cutely as we’ve seen from Adler and Aggregate, the market - and we - have lost confidence in these statements. We still expect Corestate to be backing much of the Groner empire and Partners Immobilien portfolio (Ganiyev) after some 25 assets round-tripped in the 25% sale of CG Gruppe in May 2020.
- We are afraid, Corestate’s expertise may have centred around the financing of the various vendor loans that allowed for the plethora of cashless transactions.
Accentro (Ganiyev):
- The solution will have to come from outside the company. We would have heard of Ganiyev making payment against his €60m vendor loan from Adler, which was due in September 2021.
- Natig Ganiyev originally put up merely €17m in 2017 to acquire control from Adler. He then raised a €100m loan at his holding vehicle Brookline to pay Adler further and remain with the above stub loan.
- Accentro has a €100m note from a Korean bank (a vehicle that does not fill us with confidence) and Brokline another (above discussed) €100m. We have no evidence of any connection between these facilities and Corestate / Adler, but the proximity to Adler, combined with the fact that such junior financings are very much the remit of Corestate, makes us weary of the name’s ability to refinance if for instance Corestate cannot.
Positioning:
- We remain long Adler via 2.5% of NAV in the Consus 22s, which we see as deeply protected. While much of the asset base of Consus has since been refinanced via ADO, now structurally bypassing Consus, Real Estate, the convertible is too small to matter outside a highly unlikely insolvency scenario.
- We also remain with 2% of NAV in the Adler shares, which we see as deeply value protective. Because we believe that findings from the KPMG report will ultimately be limited, we think the result should be positive for the shares. On the downside, we think that even a €1bn value correction would leave the shares just about adequately valued. Surely there would be initial volatility, but again, we consider insolvency a wholly unlikely case.
- We also remain long the Aggregate 2024s for a remaining 2% of NAV. This is a complex bet on which we have admittedly lost money since inception. However, having spoken to some of the constituents in the drama, we think a KPMG report with limited findings will allow Aggregate to steady their ship and return bonds into the high 60s. This bet has material downside.
- We have taken no positions in Corestate and Accentro for lack of transparency and lack of endogenous options respectively.
- We are long Vivion bonds for 5% of NAV as the portfolio is stable and as implications from an unwind of the Fürst should at worst be temporary and rather present a risk to Aggregate than to Vivion, who are seeing a parade of alternative suitors for the asset.
Wolfgang
E: wfelix@sarria.co.uk
T: +44 203 744 7003