Adler - How appeal-ing?

All,

Please find our updated analysis of Adler here.

As a name with considerable fur, Adler has been lagging in the recent rally. Most importantly and possibly imminently, the court of appeals could change the direction of this restructuring. We don’t think it likely that Adler should have to unwind its 2023 restructuring - it couldn’t. But looking forward, any clarification of the court on how it will handle the matter in the future could have significant implications for bondholders. If the remaining unsecured bonds were to be treated p.p. going forward, then we are calculating a recovery of 70% on today’s face value. If not, we think the 29s are toast. 


Investment Rationale:

- Following the restructuring we are holding a 3% of NAV position in the New Money and have not yet sold the tiny sliver of shares we have received in the process. We have exited the ADJ '26s over the summer as we first have to see some successful - and meaningful asset sales before the upside is evident. If not, the PIK of the New Money will be eating into the Group bond's value too quickly.

- The New Money is very attractively placed, with plenty of value to eat into. So we don't mind that it's a PIK. 

- The Group level bonds are a bet on interest rates, as well as a speedy liquidation of sufficient assets to materially pay down the Fresh Money. Recovery between them will materially depend on the verdict of the appeals court. As the market's appreciation of RE assets has been improving and as clarity from the courts should be forthcoming soon, there could again be a rationale for holding the ADJ bonds - despite the New Money PIK. We will discuss on the desk if we should buy back our position in the 26s. 

- The ARE '26s are a bet on carrying sufficient nuisance value to hold out and get paid at maturity. 

- The next event for Adler is the verdict to be handed down by the appeals court. 


Verdict Forthcoming:

- Mr. Justice Leech's decision to let the term structure of the Adler Group bonds prevail has been highly controversial and has since been contested. The appeal's court heard the case late last year and we are expecting a verdict imminently. To be sure, the verdict is taking some time to find itself down to the rest of us. So we think it won't be just as easy as black&white. 


2025 - If the decision is upheld:

- Then the existing parties should be able to vote their bonds in the same way again, favouring the short end of the bonds - possibly through the Jan 26s or even the 27s, cramming down the 29s once again. Since Adler by 2025 will likely not have had a chance to sell the yielding assets at good enough a price, we expect the shorter dated bonds to make up another two layers of liens behind the PIKed €937m 1.5 Lien New Money and the €190m 2.5 Lien New-New Money, where the €400m Jul.'25 SSNs would make up the 3.5 Lien layer and the following bonds the 4.5 Lien layer.

- Whether or not such a layer cake is feasible is one matter. Clearly the '29s would have their own view on that. But at the 20%+ PIK rates we have seen in the 2.5 lien Fresh Money, or at any high PIK rate, the restructured bonds would leave little value remaining for the '29s. We calculate ~8 cents, which where new money may be required in the process is as good as nothing.


2025 - If the decision is reversed:

- If the decision is reversed entirely, then there could be a redistribution of the New Money and compensation payments all round - at least in theory - however Adler would actually do it. We think that would be a disaster, not only from an organisational point of view, but also for the credibility of the UK process at large. More likely a loop hole will be found/opened that allows the existing deal to stand in isolation, but prohibits the implementation of another such outcome in 2025, instead requiring all remaining outstanding bonds to be treated pari passu going forward. 

- In this case bonds altogether would be looking at recoveries approx. 80 c/€ of today's par value - if, as we expect, at least some of the construction market comes back in the meantime.


Here to discuss with you,


Wolfgang

E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk

Wolfgang FelixADLER