Aggregate - Conclusion, Positioning
All,
Please find our significantly upgraded analysis of Aggregate here, as well as videos of our investment committee discussion.
So we have come to a conclusion. Following our initial take, detailed discussions with some of you, a meeting with Aggregate incl. Cevdet Caner and further discussions with other market participants and real estate investors, we are taking a position in the Holdco SUNs at 70c/€. We know some funds were better than us and have already bought and sold here, but we think the situation has moved on ever so slightly.
Caner and Affiliates:
- Cevdet Caner certainly plays a - if not the - central role at Aggregate. A very charming Austrian and gifted salesman, he is the biggest fan of his development assets, as he should be. He is also aggressive.
- Caner’s presence and prominence at Aggregate will require some cleaning up and lend credence to allegations raised in a recent short-seller report regarding past transactions that have been accounted for as at arm’s length, but that seem to have involved parties close to Caner, who himself, however, had not been formally associated with Aggregate. However, the precise legal situation being as it may, we think the allegations are of more concern to various boards of directors than to Aggregate Holdings S.A. itself. Although there could be some indirect impact from potential investigations, we think it unlikely to cause significant direct damage to investors.
- We note however, that Caner remains in control of the situation so far. Instead, we are surprised not to feel any presence of Günther Walcher, the ultimate owner of Aggregate and a number of other assets that have been recently impacted. It feels to us as if Caner is running Aggregate like a fund, as investment advisor, and Walcher may be locked up, or is perhaps long gone altogether. The lack of transparency suggests only limited corporate governance checks.
- We have continued to focus on the situation at hand and the assets that remain part of the group today.
Liquidity, Puts and Maturities:
- Without operations of its own, Holdco is primarily dependent on QH as the only asset under development from which it can borrow to pay interest. QH is a great asset, but to rely on it alone is not a strategy if it's even feasible. The vast majority of the cash on balance sheet lies indeed at the Fürst and is restricted there. That leaves only little cash at holdco.
- We have had three confirmations from Aggregate that have helped dispel some previous concerns: 1) beyond the disclosed €300m of guarantees the holding has underwritten, the project and other struct. Sr. debt has no recourse to the holding and 2) assets are mostly held separate from one another under the holding. Except for the two projects Walter and Green living, which are structurally still part of the 10project portfolio (and presumably will remain so until the acquisition debt is paid off from sales of the eight other portfolio developments) there are no cross-collateralisations or subgroups of assets where the loss of one asset leads to the loss of another. 3) Project financings are long-term and are not immediately coming due. We had been concerned by reports that Vivion were looking for a repayment of €50m and I personally had understood Vivion’s exposure to the Fürst’s sr. financing tranche was short-term. However, that accounting on Vivion’s behalf turned out to be based on the expectation that Vivion would be selling its exposure within a year from the transaction. Instead the financing itself is a two-year+ arrangement, requiring no cash outflow from Aggregate in the short term.
- With coupons just paid, we think Aggregate have time through April when its VIC convertible holders have a put option. Aggregate have a cascade of options, even if none of them is attractive. An offer to its convertible bondholders including some expensive €100m structurally sr. paper at Matinha and Pinherinho level, some even more expensive €150m stub (~50c/€) and some €50m cash ought to do it.
- We, therefore, think that Aggregate would have to raise some €100m to use half of it on VIC and half for further interest payments in order to give themselves sufficient time to further advance construction at QH and - eventually - sell some assets.
FREA:
- We continue to think of the downside at FREA to be a ZERO to Aggregate - not less. For our analysis, we have corrected valuations in the division to a point where it is 100% leveraged (and a little more). However, neither the deferred tax liability, nor the guarantees arise from this division, and so it really looks as if Zero is the downside, even if that would likely trigger the SUNs’ x-default clause.
- The liquid securities do indeed seem to be leveraged plays on Adler via stakes in Fairwater etc. We have no final confirmation of that, but have written those down to zero.
- We have also written down all other assets except for the stakes in Adler, S-Immo and a residual €260m for the other real estate assets.
- As we understand the structure, there seem to be €630m of debt associated with S-Immo (which should have its own segregated financing) and these other assets. The Adler stake is held behind a €250m loan now held by Vonovia. So there could even be an opportunity where the Adler stake rises and a sale can pay down the loan it is held under, as well as spill liquidity back into Aggregate, leaving the remaining €630m of debt in that division with below-par coverage - if Aggregate realise significant value corrections.
- Such value corrections could lead to a default of that debt (we have no details), which would lead to a x-default in the €600m SUNs. We’d expect the SUNs to waive that default however as they’d be better off.
- Note that above contemplations are on the aggressive end. We do not expect overly material value corrections to be required any time soon - except for the liquid securities portfolio.
Valuations:
- We have done a fair amount of additional work on German Real Estate and the valuations of Aggregate’s principal assets. In all, we see no reason to materially correct these assets - so long as there is time to follow through with the construction. Selling these assets in the market today would be very difficult.
- The above fact leads us to conclude that - if required - a consensual deal at holdco involving fresh cash would bee too easy to achieve to earnestly contemplate a vastly value destructive disorderly wind-down.
Just a feeling:
- Having spoken with Aggregate early on after the short seller report came out and having visited 2 Carlos Place last week in person, it is noticeable how much more upbeat the tone has become at the company. Surely, much of it is intentional and it’s certainly anecdotal, but having visited countless management teams heading for the courts, this one does not exhibit the usual “speak to my lawyer” cageyness that defines the more advanced stages. We take this as a reflection of the fundamental value in its underlying assets and the options the company has in this very hot (no hotter than high yield) real estate market.
Positioning:
- We are taking 5% of NAV in the 250m 5.5% SUNs at 70c/€. These notes mature 1.5 years before the main bulk, which may or may not be worth something (probably not). The investment is based on the conclusion that the value breaks in (restructuring) or above (no restructuring) the SUNs and that the company has some six months to put its house in order, which will involve some cash to pay interest and a refinancing at VIC level.
- The choice between restructuring or no restructuring will largely come down to Aggregate’s ability to sell at least some assets in the next six months.
- In the very short term we are anticipating both Adler and Aggregate to meet the market with Q3 figures and more transparency, which should drive valuations in their respective securities. If, however, we hear of no material advances between now and February, we are likely to reduce, if not sell our exposure, subject to further information obtained between now and then.
Please reach out to discuss this name.
Wolfgang
T: +44 203 744 7003