CPI Property Group – Making a splash - Positioning
All,
Please find our unchanged analysis here.
CPI Property Group (CPI) has €1.5 billion in Perpetual bonds in circulation; €525 million has the first reset date in October 2025. We expect an exchange offer, which is likely to include some cash. CPI will not rush this fence and has 15 months before the reset. Initially, we were reluctant to get involved in the Perps, but the upside/downside calculation makes the timing right to make a splash. We have uploaded our video discussion of the name including our investment rationale to our website for clients.
Investment Rationale:
- We have decided to take a 3% long position in the 4.875% Perpetual Securities with a reset date in November 2025, as our analysis points to an exchange offer for the 2026 bonds with a package worth 85c/€. The exchange equates to 20 points of upside, with the downside coming from CPI becoming distressed; even with consolidated LTV <60%, the hybrids would fall at least 15 points to 50c/€. However, we consider distress to be a low risk.
- The €400m Jan-28 bonds yield 8.5%. It is not compelling, but the bonds will benefit from rate falls in 2025. There are 6 points of upside from a 100bp fall in rates.
- The longer-dated January 2030 SUN is priced at 74c/€ (YTW 8.2%) but does offer greater convexity with a coupon <2%.
- We do not see a quick return to Hybrid Issuance by real estate Issuers. The Hybrids decoupled from the bonds and will not be called or replaced, but CPI may target them in future tenders (as the lowest-price bonds). On reset dates, CPI will look to exchange the hybrids to reduce the cost of coupon resets. Given liquidity from asset sales and the continued stock buybacks, hybrid coupons will continue to be paid in cash.
- The Muddy Watters's claims are overblown but shine a light on weak governance. After five reports, we would not rule out another shot being fired at CPI.
- CPI Property shares the governance failings of its peers but is addressing these issues. The structure is more complex than it needs to be.
- CPI is mainly selling assets in Western Europe as volumes in CEE have not yet picked up. LTV through the SUNs at the LTV level is 69% vs 58% on a fully consolidated basis.
An exchange would offer value to both the company and Perpetual holders:
- We expect a package worth 85c/€. Holders could receive 10c/€ in cash and a 6% new Perp. The new Perps trading at 75c/€ => a yield of 12.3% (80c => 11% and 90c => 8.2%). A yield of 12.3% would represent a 450bp pick up vs the Jan-31 SUNs. For CPI, 6% vs 8.45% represents a saving of up to €13m a year.
- At 80c/€ CPI could argue that this is not a distressed exchange and avoid temporary Rating problems.
-The 2025 Perps have a coupon step up to Mid Swaps + 5.733% = 8.45% vs the current coupon of 4.875%. At a yield of 8.2% => 90c/€ + 10c/€ cash, it would be attractive to debt investors. The 2025 perps have a running yield of 7.22%, which is in line with yields on the short end of the SUN curve.
- We do not see the company choosing to PIK the Perps as CPI has ample liquidity and will augment its cash through asset sales.
- As with the recent €500m 2031 SUN, pricing debt at >8% vs yields of 6% is not sustainable in the long term but CPI is reducing debt and kicking that can down the road until market conditions hopefully improve.
I look forward to discussing this with you all
Aengus
T: +44 203 744 7055