Adler - better
All,
Please find our further updated analysis here.
Today’s release by Adler deserves the rare praise of answering more questions than it raises. It has certainly helped shape our thinking a little bit further. Having reshuffled some of the asset sales in our analysis, we come to three conclusions, that allow us to concentrate more efforts on the important bits.
265:
- Adler’s “response” to questions surrounding the €265m intercompany loan up to ADLER Group S.A. is merely technical and should do little to stop the ongoing attack on the subject.
- By citing the aim of avoiding negative interest on the cash balance and the granting of the loan to Adler Group as “arms-length”, management imply that in their best judgement they could find no better way to invest the cash than to transfer it almost for free to a near insolvent entity whose 97% holding in Adler RE would have been a mere coincidence. Oh well…
- We expect armies of law firms to try and establish if it was coincidence, incompetence or theft. For the transaction itself, any verdict will likely come too late to matter outside of an insolvency scenario. “IF” Adler can raise liquidity as planned and receive a clean audit opinion in 11 months’ time, then Adler Group can repay the cash and it’s all a moot point.
- The implications are however wider. The transfer was apparently necessary for the group’s survival. Structuring it as dividend would have cost taxes. By justifiably attacking the directors over this transaction, investors stifle Adler’s flexibility to preserve liquidity throughout the group. The easy fix for Adler, however, should be to stick to short-term lending until KPMG need visibility again in the next audit and by then to have completed the domination agreement, so none of this even becomes reportable again.
-> So its certainly more than a storm in a tea-cup, but we don’t think it’ll actually lead anywhere.
Receivables “on track":
- Except for the unwound transactions of Gerresheimer and Partners Immobilien, none of the €1bn receivables advertised per H121 are actually likely to be collected in the foreseeable future. The two assets have brought €209m and €165m back on ARE’s and ADO’s books respectively, but the former is already included in the Brack valuation.
- This is not to say that the remaining €580m are worthless, but their collection does not look imminent as in the case of RETT blockers, structured finance baskets or minority stakes dependent on portfolio sales controlled by the VJ partners.
- In the case of Gröner, Adler clearly either don’t want those projects back, perhaps because their financing contains a CoC clause or their value has diminished. Or management are perhaps mindful of the information he holds wrt. Cevdet Caner. At least Adler’s restraint in the €84m matter is noteworthy.
- Natig Ganiyev still owes nearly €60m for his shares in Accentro, but reversing that transaction only requires Adler to deal with upcoming bond maturities there. Accentro is going through a transformation of its own and requires fresh cash. So Ganiyev is unlikely to throw good money after bad - at least until he resolves the refinancing situation.
- “Legacy Receivables” are by definition not “on track”.
-> Little to be expected here to bolster near-term cash generation.
975:
- Upon clarification today, the €975m anticipated sales proceeds in H222 contain ca. €200m of signed and ca. €785m of unsigned disposals. Each group containing one disposal marked as confidential.
- We stand by yesterday’s conclusion however, that Adler may find it hard to accelerate its disposal program sufficiently. Or at least Adler have in the past not demonstrated this volume to make us comfortably rely on the program. For this reason, we deem the Brack sale still necessary - preferably to LEG, but if not, a solution with LEG could involve a joint share sale to a third party or asset sales.
-> The depth of the market for these development assets now decides everything. We think it’s a lot deeper than FED-frightened HY.
X-Guarantees:
- The news is that some of the debt is in fact cross guaranteed. The company refers in particular to secured debt “where subsidiaries of Adler RE and Adler Group borrow under the same loan agreement and are subject to collective land charge.” There also seems to be one loan at Consus level for which Adler Group has issued a letter of comfort.
- We are not sure which loan debt is subject to cross guarantees. As far as we can identify, Adler raised €100m in April and May 2021 with maturity of 2028 and the €400m June 2025 LBBW loan at around the same time. It seems to be secured over some 9,500 rest units with 589.000 m2 throughout Germany.
- To what extent the LBBW loan will be reduced by the current portfolio transactions is difficult to say, but it would be the single largest secured loan agreement Adler have in place and together with the €100m discussed above, it is the only major one Adler visibly raised after the merger.
-> In case of indigestion, LBBW would be the main secured party to bring to the table - should that become necessary. €400-500m would be a sizeable block to benefit from cross guarantees. But otherwise, the structure promises to be reasonably clean. Adler has had only limited time to create major confusion between its newly merged businesses.
Positioning:
- We stick to our positioning as per yesterday’s mail.
- The Adler timeline has changed, in that there are few upcoming events now, safe for potential negative ones from an office raid for instance.
- There should be little to propel the stock upwards before LEG exercise their option and while we are confident that LEG will exercise, any failure of it would send the shares even lower. Yet we doubt how strong the sale on its own will be for the shares. So we may be inclined to add to the equity position then.
- We consider ARE bonds relatively safe and certainly more than value covered, even in an insolvency scenario. LBBW (if our guess is right) would have a double-dip but should be so well value covered on their security that even in an adverse scenario the ARE unsecureds should do well. One caveat would be the danger of solvently liquidating ARE and sending the cash up to ADO. We have not yet reviewed bond covenants to understand the loopholes for this.
- ADO bonds are taking a dire outlook on life. The ADO Berlin portfolio is very attractive and the discount is pricing in a strong probability of default which we don’t consider nearly as likely. Between 50 and 60 c/€, bonds imply a discount to NAV of €4bn for the group, which reflects a high likelihood of both insolvency and fire-sale discounts for the Consus assets. Discounts on disposals over the next months will give some indication of much value correction may be needed, but they certainly look attractive here. Adler looks still far more likely to survive than to go into insolvency. Still, while there are probably few upside events in the short-term we are waiting for one or two to materialise before doubling down.
Wolfgang