Aggregate: How bad is it?

All,

Please find our updated analysis of Aggregate here.

The bonds have not bounced following the waiver. Bondholders must fear that they are dominated by a majority that is friendly with the company or holds other exposures in the structure, in favour of which they are happy to convert the bonds into de facto sr. equity. 

However, the company now has the opportunity to complete its two large developments in Berlin. The market for commercial RE is very weak at present, but it remains in fact quite strong for new top-end space and both developments are AAA. 

Investment Rationale:

- We remain long the 2025s for 1.5% of NAV. The investment has been a mistake, but from current levels and given Aggregate have received their bond waivers, we have reason to believe the bonds will recover multiples of their current trading price, even if there may be an Amend and Extend in 2025. 

- Quartier Heidestraße and the Fürst are on the books for 4.5% net rental yields, which is too tight in this environment. But rents are tied to inflation and much remains yet to be leased, which we don’t believe will be difficult. 

- The inverted yield curve should also provide a mild tailwind in coming quarters and years.

- In short, following the exit from VIC, Aggregate’s activities are concentrated on a corner of the commercial real estate segment that is far less impacted than the bulk of the market and we perceive a good chance that bondholders can recover as much as par - subject to said silent majority that seems to have different incentives. 

Waivers:

- The waiver for the 2025s came 55% pre-agreed without those investors demanding the structural changes we would have deemed achievable to put bondholders into a stronger position going forward. 

- This raises the fear that the bonds could be compromised by holders who have other incentives in the structure and negotiate to transfer value from this pocket to another.

- It has been a theme with Aggregate that sellers of assets have accepted Aggregate bonds as payment. 

Other Assets:

- If Aggregate are unable to raise an enormous amount of financing to develop its early-stage assets, we expect the company to lose control over them.

- Except for QH and the Fürst, Aggregate only hold early-stage assets. If Aggregate are to retain control of at least some of these assets, the required fresh cash would forcibly layer the bonds. 

- Aggregate therefore do have options, but those are to be valued as such.

Wolfgang

E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk