Accentro - Passing the parcel.
All,
Please find our unchanged analysis here.
On the 31st of August, Accentro will publish its results for the first half of 2022 and have its AGM and perhaps Accentro’s minority shareholders will take the opportunity to enquire about what is going on at their company. The March 23 SUNs currently trade at 42c/€ as maturity is imminent. Accentro has bought itself some goodwill, but how does it propose to persuade bondholders to extend their bonds? We consider asset valuation and the impact on bond pricing and look at who will potentially control the equity in any restructuring.
The value of the investment assets is dubious:
- Accentro’s decision to bet the company on distressed assets in eastern German cities has struck us distinctly suspicious. Was the plan always to pass the parcel to someone else before the music stopped? The company has no experience with major construction projects and has not commented on what sort of refurbishment costs are required to reduce vacancy rates. Is the demand even there?
- Accentro has done little or nothing with the east portfolio since its acquisition. Our analysis showed that a cash injection of €100m would provide enough cash to refurbish the acquired assets. We have seen nothing so far to suggest there is a plan.
- The SUNs now trade at 42c/€ => an impairment of 70% to book value. If we use a zero valuation for the east German investment assets and apply a 25% discount to the remaining assets, we come to a valuation of about 50c/€.
- We are suspicious of the decision to acquire 682 additional apartments (also with distressed occupancy levels) in July 22. We cannot believe this acquisition would have been a priority for management when its SUNs were already trading at distressed levels. We have heard that the upfront cash payments are modest, but who was driving this deal? It’s not as if the original eastern German assets were attracting new tenants.
Options for Accentro?
1. Keep the inventory/investment portfolios, amend, and extend the bonds, and raise the necessary cash to fund the refurbishment plan 2. Sell the investment portfolio and return to being a refurbisher of apartments. 3. Sell the inventory portfolio, get the bondholders to amend and extend in return for enhanced coupon and raise the cash for the refurbishment project (€100m by our modelling). 4. Sell both the portfolios and break the company up.
- Given the questions around governance we do not think a passive amend and extend from bondholders with existing management and strategy remaining in place is feasible.
- A distressed tender could allow the shareholders to remain whole but would deplete the available cash on hand and increase the cash flow gap for the refurbishment of the investment assets - if that is the plan.
- Deciding the best solution will need answers to three questions: 1. How much additional cash is required to refurbish and normalise vacancy rates in the investment apartments and is it even possible? 2. Is Accentro a credible construction partner and who is driving investment decisions? 3. Will the banks roll any of the €156m of the bank debt due < 1 year and allow cash flow to be used to support the company? For now, we assume there are no covenant issues on the remaining £100m of bank debt.
The company has a limited window:
- Paying the coupon leaves Accentro in control of timing but maturity is only six months away. The company paid the coupon that fell due on the 13th of August. The next payment point is maturity in March 23. It has not yet actively sought to interact with its creditors.
- The SUNs are not currently refinanceable. Accentro is already working with White & Case regarding its options. Houlihan Lokey is looking to work with bondholders, but we do not know the proportion of bondholders that are represented.
- The other SUN outstanding is a €100m note held by a single pension fund. This instrument will also need to be part of any restructuring discussion.
How much is Accentro worth?
- We see the bonds as valued at 55c/€ with €200m of value to cover €350m in bonds.
- Discounted (2 years/20%) we get 38c/€. Given the level of opacity in Accento's business and our corporate governance concerns that cushion isn't sufficient yet.
- Net assets €550m less Loans €255m less Advance Paid cash and fees €50m less additional cash required = €200m of value for €350m of SUNs.
- We have ascribed zero value to the east German investment assets (having assumed €125m value before). We also assume that the additional cash required is €50m (smaller scope of work).
- The hidden reserve within the Inventory portfolio (€100m) is excluded for now.
- Accentro needs to persuade its investors what value there is in the east German investment assets it bought and to explain how that value is to be unlocked and who it expects to pay.
- The opaque nature of the investment portfolio acquisition and the distressed nature of the assets warrant an explanation from management and the lack of one so far justifies caution.
Who controls the equity?
- The equity is 83% controlled by funds advised by Natig Ganiyev. The vendor of the equity was Adler. We believe that Cevdet Caner is heavily involved with Accentro via Ganiyev.
- The value of Ganiyev’s ownership vehicle, Brookline’s majority stake in Accentro barely covers the bank loans that fell due in July. Accentro’s market cap is €119m, and the loan to Brookline to finance the purchase was €110m in December 2021 and was accruing interest at 9% (PIK). At the very least the banks will be looking for additional collateral from Ganiyev, if he has any.
- Management may be the face of negotiations but the process will not be simple. Caner is in the background and there is the potential that he will be in control of the equity (given the €60m unpaid and overdue receivable) in Adler’s accounts. It is also possible that the equity is under the control of the Korean bank that provided Ganiyev with the loan to purchase the equity from Adler.
- Governance questions around the acquisition of east Portfolio also need addressing. Who drove the purchase and who was the vendor? Who has been driving the investment strategy bus and for the benefit of who? We expect that this parcel of assets was being passed temporarily to Accentro but that circumstances have left them stuck with it.
- The delay in Accentro engaging with bondholders could be down to the company expecting a “bail-out”. Aggregate Holdings will have €500m of cash available when the QH asset is sold (expected imminently). In this murky world, we cannot rule out that Caner chooses to provide cash to Accentro.
Investment Considerations
At 42c/€ the price of the SUNs is below the 55c/€ valuation we have calculated with zero value from the east German investment portfolio. Our reticence to pull the trigger is driven by concerns as to what the east Portfolio is worth (if anything), and we remain concerned that the purchase was not driven by management at Accentro. There will be more information available which will allow a more robust valuation.
- The decision to double down and acquire more distressed assets in the area has further raised our suspicions that Accentro is being used as a parking lot for assets. The process of restructuring is slowly getting into gear. Time is short and we will update after the AGM/H1 results.
- On the upside, we are aware the Caner may have cash in his pocket once Aggregate completes its asset sales and fresh money may become available.
I look forward to engaging with all of you on this.
Regards,
Aengus
E: amcmahon@sarria.co.uk
T: +44 203 744 7055