Adler - More Brack, Less Consus and No KPMG - Positioning
All,
Please find our only slightly amended analysis here.
What in light of this week’s Bundestag enquiry was supposed to be a PR exercise on Adler’s corporate governance predictably turned out to be entirely focused on valuations, structure and liquidity. Eventually, though, the real news only came from KPMG in the afternoon. Three points are having an impact: 1) alternatives to intercompany write-offs, 2) the growing importance of Brack and in particular 3) the exit of KPMG.
Consus Balance Sheet Restructuring:
- Following the write-off of goodwill in the consolidated accounts - mainly relating to Consus projects - the value reductions yet have to be accomplished in the German GAAP (HGB) accounts of Consus, which runs on a longer timeline than the IFRS accounts of the group.
- Because this will result in negative equity at Consus level, the obvious solution for ADO is to swap their intercompany loans for equity in Consus.
- However, following the scrutiny of upstream intercompany loans within the group (Consus also has no domination agreement) it could be cumbersome to pass sales proceeds up to ADJ when Consus assets are sold (big wave promised for H222).
- Alternatively, we think the hiring of PJT may be to effectively advise ADJ in credit bidding for assets from Consus with the fully outstanding intercompany loans, so as to bring those assets into ADJ and receive sales proceeds directly where they will be needed to retire debt.
-> The Consus 22s would in theory benefit from an intercompany loan write-down and suffer from a credit bidding. In reality, however, we do not see either as particularly relevant, because either way, ADJ intercompany loans have probably bypassed the old holdco structure and layered the Consus convert.
Parking €100-200m in Brack:
- Brack are struggling to roll the short-term debt at Brack, who have over €250m of secured debt rolling off this year in Q2 and Q3. ARE is therefore forced to plug the gap (downstream/short-term related party loan is technically not a problem).
- The liquidity constraint however was not in the cash bridge presented earlier this month and represents an additional binding of approx €150m capital - at least between now and September.
- If we are right, this cash commitment effectively plugs the €147m loan at Gerresheimer that matures in June. Following write-off, this loan has become too large from an LTV perspective and of course, given the unresolved planning situation, banks are cautious to extend here. What irks us somewhat is - again, if we are right - that this should have been entirely visible two weeks ago (two years ago in fact). So how come it was not in the figures of the year-end presentation or the one that followed it?
- As we have argued before, the sale of Brack is very central to the liquidity of Adler going forward. While numerically there are scenarios in which Adler survives without the sale, we think failure to execute would send a very negative signal and tighten the noose around the company’s neck.
- Nevertheless, we do not consider LEG the only buyer in town and neither is the share sale in its current form. If LEG are not fond of one or the other asset, we assume ARE could buy that asset off Brack to make the bride pretty. We are not sure if there are structural (upstream loan) or tax reasons that would render an asset sale scenario any less favourable.
-> For now, the conclusion is that the Brack deal with LEG has just become €150m more important.
What are LEG waiting for:
- We don’t know. LEG has about €315m of development assets on the books, including the infamous Gerresheim project (post-write-off). We understand Brack to have split the site and seeking a building permit for at least one part. LEG might be waiting for such a confirmation, which should raise the value of the asset considerably.
- Alternatively, we see institutional RE investors make a wide circle around Adler. Nobody wants to be remotely associated with the situation, to avoid reputational damage. LEG may be waiting for KPMG to signal a hardened Jan 22 balance sheet before deciding that by entering into the transaction they gain the asset and allow Adler to return to the land of the living.
- We expect LEG to know the risk assets involved. Communication of the option deal came only two days after Q321 reporting, detailing the unwind of the Gerresheimer project.
-> We do not know, but we imagine some form of audit opinion of Adler Group will be important to LEG. We note that Brack themselves have received a clean opinion from KPMG on March 24th 2022. Presumably this is the more important document.
Hardening of the January 1st Balance Sheet:
- Just this morning, KPMG were confirmed to us as in agreement with the strategy to harden the balance sheet as of January 1st 2022 and to do so following the closing of H122 - probably in July. The strategy had been previously outlined, but not confirmed. Now we are learning that KPMG have this afternoon turned down the proposal. This means Adler must find a new auditor - presto.
- As positive as we felt about the initial confirmation of the strategy, as negative do we feel now about having to find a new auditor. Any new auditor accepting the invitation now is going to want to take a lot of time and we are concerned this could take too long for LEG - if the LEG transaction is indeed dependent on Adler Group accounts. If so, we imagine the race is (was?) on to get Jan 22 hardened before September 30th, when the LEG option expires.
-> KPMG walking out could (perhaps) deal a big blow to efforts selling Brack to LEG before their option expires and should generally slow down Adler's public restitution considerably.
Positioning:
- We are out of the equity at €5.10. We had bought a small 2% of NAV position earlier this year at €9.50 on the view that the KPMG report would do less damage than it did. We were mightily wrong about that. Since then the question had morphed into degree of fall-out, but at least KPMG remained in the mix as auditor going forward. Now their exit is likely to materially stretch the time it will take Adler to receive a clean audit opinion and a new auditor - when found - will (have to) take all the time they can. This potentially pushes any receipt of audited financials (with opinion) beyond the maturity even of the ARE 2023 bonds.
- There is also a chance that LEG are looking for some kind of audit opinion / hardened BS or similar from Adler Group, in which case that will no longer be happening until well after their option on Brack expires.
- It is certainly possible that LEG do execute on the option now that we are out of the shares, but that chance alone would not have us hold the ADJ shares in this environment.
- We are keeping our Consus 22s. On the one hand we do think there will be sufficient liquidity to have us covered even without a sale of Brack to LEG. On the other, we see indications about 20 points wide and are not sure if there is even a bid in the first place.
- We may re-enter the name more meaningfully after the summer or after news that the Brack transaction has materialised - even if we might be missing out on a few points in the interim. On that note, we are also looking favourably upon the ADJ bonds in the 60s. Their upside/downside potential is likely better than that of the shares right now.
Happy to discuss,
Wolfgang
E: wfelix@sarria.co.uk
T: +44 203 744 7003