Rotating 25% of NAV

All,

In light of the current market volatility, we are rotating approx. 25% of NAV into a number of names that we have been following for a while and which we think have traded off too far, or which have not reflected the benefit of recent positive events. Today we are buying the six names: Iceland, Douglas PIKs, Standard Profil, OHL, JLR, and Vivion.

Because hedging is difficult to model on an excel book, have built up some cash to accommodate those purchases. We have also recently had a number of bond redemptions, are closing our KME short (unsuccessful), are selling our position in Rekeep, and are reducing risk on Aggregate.

Iceland:

- We have been comfortable with Iceland’s development throughout 2021 and have confidence in the strong management, even if it is not entirely aligned with bondholders. We have been holding off on buying the bonds due to fear of high issuance from Asda and Morrisons, which could cause some holders to re-allocate but for now, that risk seems contained.

- The 2025s yield 7.5% and have about as much upside as the 2028s, but with less duration.

- We are buying 5% of NAV.

Douglas:

- The German-headquartered retailer reported robust Q1 (Christmas) figures, even as online growth only just remained flat on Q121. With Q1 behind us, we don’t anticipate any significant news for another 11 months.

- The bonds yield over 10% PIK to 2026 and on continued performance (Germany dropped 2G rule and half the year has been earned in Q1) should have upside to approx. par.

- We are buying 5% of NAV.

Standard Profil:

- We expect to initiate on the name on Tuesday. The company has been suffering from low volumes due to chip shortages at the OEMs and has seen raw material prices rise substantially at the same time. The long-awaited s.s. RCF has not yet closed but has been agreed, which should help to cover requirements over the year. We are modelling tight cash flows, which the company aims to exceed with cost savings packages, the details of which we do not have, however.

- All in all we have confidence in management and the process has been going in the right direction. The RCF affords management sufficient time to find sufficient cost savings for a balanced cash flow in 2023.

- We see sufficient bonds offered at 83.5 c/€ and think they might trade sideways for a while until OEM volumes lend them fantasy - which should be before the company itself shows material improvement.

- We are buying 5% of NAV.

JLR:

- We are not fans of the long-term prospects of JLR, which has primarily to do with the unknown expense the company faces to increase its share of fully electric vehicles. This being a long-term question, however, the large cash balance, their B+ rating, and relatively uneventful short-term outlook should make them safe to hold and an easy buy for anyone re-allocating cash.

- The 4.25% 2028s should have upside into the high 90s, but running yield is limited, its a GBP name and the outlook is stable, but a little bit boring.

- We are buying 2.5% of NAV.

OHLA:

- We will be are re-allocating the proceeds from the oncoming bond redemption to re-build our bond position in the name. We continue to like the prospects of rising infrastructure spending on either side of the Atlantic, which OHL should be able to take advantage of with their improving funding relationships with banks.

- Meanwhile, development assets are proving their / rising in value. We consider the realistic exposure from litigation - notably from Qatar - to be manageable.

- The bonds are yielding approx. 10% into 25/26 and should continue their post-reorg rise towards par. The aim is to re-build a 5% of NAV position in those bonds, so we are buying an extra 1% now.

- For that reason, we will also add another 1% of NAV to build out our OHLA equity position to a total of 3.5% of NAV.

Vivion:

- With its large cash balance, Vivion should be able to capitalise on any German RE crisis, should it unfold. Meanwhile, its own assets should remain stable as the UK and German covid measures receede.

- The name carries downside from a potential unwinding of the Fürst transaction, even if Vivion might have bidders waiting to step in. Should management choose to be as aggressive as Vonovia have been, then Aggregate should have trouble and Vivion might have to deal with an administrator enforcing the German side of the law onto Vivion. However, the actual risk to Vivion from taking back the Fürst should be minimal as the asset undoubtedly is in strong demand. In June 21 the bond gained a mere 2 points from the sale to Aggregate. So the short-term risk should not be that much larger.

- The 2024s are yielding over 5.5% on the offer and given cash balance and steady asset base should tighten in the coming months.

- We are buying 5% of NAV.

Rekeep:

- This story has played out a while back and bonds are call constraint. This makes them wonderfully steady in a sell-off, but from here we’d rather re-allocate the remaining position to help fund the above purchases.

Aggregate:

- We’ve been long and wrong Aggregate for some time. The latest action from Vonovia was admittedly not a risk we had attached a high probability to.

- With confidence in its finances further shaken, Aggregate could find it more difficult than we had expected to secure the refinancings of VIC and Fürst.

- Bonds are now below 50c/€, a price we consider backed by its three main assets alone. But we are not sure of the value in some of the obscure FREA assets and without those, bonds are pricing the three assets through the equity - no discount.

- We still believe in Aggregate’s assets, but the plot has unquestionably been thickening since we bought our piece. As per above, if Aggregate fail to find a buyer for the Fürst SSNs (which we think should be entirely possible), or even if its argument that the Adler SPV was not a “Material Subsidiary” fails, the bonds are in for a further drop.

- As a result we have to de-risk what has dropped to a 3% position by another 1% down to 2%. It pains us somewhat, but we have gotten the trade wrong so far and there has got to be some discipline. We are selling that position at 45c/€ to reflect what should be a hard-to-move asset on a Friday afternoon. We will gladly increase the position when we feel more confident again.

- This could be a difficult weekend for Aggregate.

Please contact us on any of the above trades.

Wolfgang