Aggregate - Selling the elephant
All,
Please find our updated analysis here.
Much has happened at Aggregate since we first published our analysis back in October 21, but it that pales in comparison to what will have to happen now. Bondholder recoveries vary wildly between scenarios and not all is under their, or even Aggregate’s immediate control. Still, if the stricken developer can herd its cats through summer to sell the elephant that is QH, what will be the options then? And how should bondholders behave?
First Hurdle - Vivion:
- Aggregate still owe Vivion €220m for the Fürst project and Vivion are not enthused about the impact that has on their bonds.
- Vivion hold a security package including a share pledge over Fürst, €220m of bonds (at deep discount now) and some form of pledge over three assets which we understand are the property of Günther Walcher - away from Aggregate. Under German law, if Vivion foreclosed, these assets would be sold and Aggregate would receive the proceeds above Vivion’s claim. However, there is a possibility that under Luxembourg law the situation would be worse for Aggregate. Vivion may not be the company to play this hard, but there are buyers of their package that might.
-> So if Aggregate lose the Fürst like they lost the Adler stake, then the bonds can start organising.
Second Hurdle - Financials and Covenants:
- The annual accounts are due by June 30th and covenants will at best be a close shave.
- Whether E&Y will give an opinion on the accounts is perhaps still up for speculation, but we have largely made up our minds, even if the Adler investigations do not immediately focus on a transaction that involved Aggregate. If E&Y do choose to give any kind of opinion, then that would be positive.
-> Depending on E&Y’s stance therefore that moment may require at least a waiver.
Third hurdle - QH Sale:
- QH is a high-quality asset that is progressing well and because of its uniformity also very predictable. Aggregate have to sell it to raise liquidity for their various other holdings, but also because in the past, raising incremental loans on the asset was how the developer financed itself. Now, without access to the market, it has to sell the project and use the proceeds.
- We last saw this asset on the books for €890m of NAV. Some say it may be worth more now, some are cautious of rates rising faster than rents. The latter are inflation-indexed, but because this is Berlin, raising resi rent - while possible - is not so easy. Still, we see the weak HY market underestimating the strength of the property market here.
- If Aggregate survive the summer, QH might just find a new owner (for cash) and after paying down the Deutschland convert, Aggregate could suddenly be sitting on a cash pile of €500m or more. The not-so-bright scenario would include a “related party” buyer who pays with some cash (for VIC and Fürst), but otherwise with a deferred payment component, which then helps Aggregate keep their bondholders honest.
-> If the above stars align, bondholders could triple their money from current levels. If Aggregate fail to take any of these hurdles and descend into a disorderly process, then the downside could be a zero - in the extreme.
Tangent - Embarras de Richesse:
- Holdco bonds are not due for another 2 years. So if in Aggregate’s seats, would we pay down the holdco debt and hope to squeeze some value from somewhere to pay the rest in the future - else lose it all?
- Or would we buy Adler? We’d know the asset better than anyone (trust us). Between Vonovia and our various un-related parties, we’d already control almost half the €550m of market cap. Surely the recent share drop, would command a hefty premium, but we might just have enough dough now. We’d ask shareholders to forfeit their rights to sue Adler or us too and make the bid contingent on a favourable CoC waiver from bondholders, then take it private - in Luxembourg.
- CoCs and Adler bonds: All the public Adler debt would come due. But if bonds accelerate, the lucky administrator has his retirement secured. The fraud case would take years to work out and bondholders would see no distribution for the next five years.
- We could think of more than a few ways to structure a better outcome for the bonds that would allow Aggregate to secure their favour.
- Aggregate would sell ADO to Vonovia for cash and a share buy-back and sell the remaining yielding assets to hold a largely debt free Consus - still worth multiples of the investment it made to buy Adler.
- Happy refinancing.
Result:
- Waking up again, we find we are still long the 24s for approx. 2% of NAV. We have been long and wrong here for some time (thankfully sold some on the way down).
- Depending on how the pledges at various intermediate hold’s are structured and on how much fresh cash bondholders would be willing to bring, the downside of this investment could be close to zero. The upside, by contrast, could be 3x.
- For this kind of profile a 2% position is probably adequate, but if we could establish how these financings are written, we might want to put on more risk again.
- The next months are going to bring a number of events. Away from everything happening at Adler, Aggregate have Vivion and VIC to deal with, for which they must sell QH - for at least a large cash component. VIC bondholders have agreed to wait. Provided Vivion do the same, we would also see that moment as an opportunity to add risk again.
Happy to discuss,
Wolfgang
E: wfelix@sarria.co.uk
T: +44 203 744 7003