Accentro – Taking a pill.
All,
Please find our updated analysis here.
Bank credit for individual house buyers has been more difficult for borrowers to source, both in terms of interest rates and the initial deposits required. We do think the H1 fall off is not all about banks and may be partly about offered prices for houses. The company has also struggled to get portfolio (building) sales away, as bids are coming in at significant discounts to book value. Accentro has a €60m bond repayment coming up at the end of December and needs to raise cash or risk losing the business to creditors, if they cannot find the cash, or once again get creditors to postpone repayment. Our analysis points to a minimum requirement of €60m. We were sceptical about the restructuring completed in February, and we think a further round will be necessary in 2024.
Investment Considerations:
- At 63c/€ the SUNs look expensive to us. We expect to be back at the table again soon, even if finance is cobbled together for December 23, there is another €60m payment needed by December 2024. Our reasons for steering clear of Accentro at the restructuring have not changed, so we are staying on the sidelines.
- We had anticipated a reluctance to sell assets, and so it has proved. Management is now between a rock and a hard place; it needs cash, but buyers, aware of the bond redemption, are pricing bids accordingly.
- The refusal to discuss liquidity or sales post the end of the first half points to Q3 continuing the weak theme.
- Demand for housing, particularly in Berlin, is strong. The problem is that Accentro cannot stand still and wait for the good times to roll.
- Accentro waited until the last minute before engaging with creditors about extending its bonds and we expect the same to happen here. The next trigger point will be the Q3 results due at the end of November 2023.
Cash for bond repayments due by December 23 will be tight:
- Accentro cannot make the €60m bond redemption in December without significant condo or portfolio sales in the final quarter. According to our analysis, Accentro will need to generate at least €60m in sales in 23H2, more than was achieved in 2021 or 2022.
- Selling a building below market value might be a bitter pill for Accentro to swallow, but it is preferable to creditors assuming control.
- At the end of H1, Accentro had €38m of cash; management estimates €20m as the minimum cash needed to operate the business. We estimate that restricted cash (sequestered stage payments for construction) is at least €20m, but the company refused to answer this question on the call. The figure was >€45m in Dec-22.
No progress on the sale of the business:
- No progress has been made on the potential sale of Accentro. Company management said that the buyers had not approached bondholders to waive the change of control covenant.
- The carrot of €50m in equity investment could be enough for investors to agree to waive the change of control clause. The fresh equity would substantially fill the cash gap required for the bond redemption in December.
- The Korean bank that funded Brookline’s purchase of Accentro shares, has now teamed up with Nox (a German Real Estate Manager). They now control the 75% stake Brookline had, and are looking to buy out the remaining 25%. If investors agree to waive their Change of Control Clause, the new owners would inject €50m in fresh equity.
The operational environment is weak:
- Inventory sales stalled in H1, and whilst H2 is usually better for completions, management was reticent to give any comfort on performance.
- Accentro’s full year 23 guidance was always a stretch; it was no surprise when it was withdrawn in August.
- Individual Apartment sales; Accentro is still seeing a lot of interest in individual condominiums; however, potential buyers are struggling to obtain external financing, reducing completions.
- Portfolio sales; Buyers view Accentro as a forced seller, and bids for buildings are coming at a discount of 15% - 30% to book value. The assessed value of the portfolio is €257m, with the book value at €215m. Accentro does not want to cede potential equity value to purchasers, but with repayments looming, there is little choice.
- Also the assets are relatively low quality, which typically is the last segment to catch a bid.
I look forward to discussing this with you all
Aengus
T: +44 203 744 7055