Adler - How to unbake the cake.
All,
Please find our unchanged model of Adler here.
We had expected yesterday’s verdict to provide more clarity to Adler and therefore to generally boost valuations of a name that has lagged behind the recent market euphoria. We were sure that the courts would not hand down a verdict that would leave not only the company but the jurisdiction in limbo. But here we are. As per a previous note, we see this argument as one between a surgeon and a judge. The surgeon performs his operation to mimic the previously existing status quo - life, so the wretch can continue paying his debts as they fall due. The judge will intervene with a plan to mimic the alternative case - death. It’s judges we are dealing with… So what now?
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 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.
What were the notes amended for?
1) Allow the refinancing of existing struct. sr. debt with fresh cash from new secured debt (’tis done),
2) Extend the ADJ24s with a second lien (not pari passu),
3) Raise the coupon on by the PIK component (not overly contentious),
4) Amend reporting covenants (not overly contentious).
The central surviving argument of the 29s (never mind the eight arguments in the appeal) is the violation of the pari passu principle. The other arguments have either been refuted or merely support the pari passu argument. We therefore focus on how an alternative plan would have distributed the burden and the goodies.
The refinancing (element 1 above):
- This was mostly a left-pocket / right-pocket affair, but that cannot be undone now. It also doesn’t necessarily have to be. What it amounts to is a refinancing of structurally sr. notes with new structurally sr. secured debt. Even though the security package now also includes the Transaction Collateral (ADO’s Assets) its effect has mostly just been a substitution.
- We therefore see no great need to unwind this transaction. The 29s could argue that they would have participated more readily in providing this fresh cash if it hadn’t been tied to a restructuring that treated them unfairly, but no such argument formed part of the appeal process and the 107c/€ trading level of the fresh cash today probably doesn’t get their blood pumping.
The extension and elevation of the ADJ24s (element 2 above):
- If the pari passu argument now stands and applies (the last word on the matter has not yet been spoken), then all bonds would have received a common package. This could have included equity, but the majority of bondholders by any count decided (for good reason) not to convert. We therefore conclude that the Steinhoffisation of Adler should remain a feature under any alternative plan - for now.
Alternative plan:
1) Allow the refinancing of existing struct. sr. debt with fresh cash from new secured debt (same),
2) Setting a common maturity date for all bonds - say at December 2025 and depriving the ADJ24s of their seniority (new),
3) Raise the coupon on by the PIK component (same),
4) Amend reporting covenants (same).
Outcome:
- This amendment of the plan could be quite easily implemented. The ADJ24s would lose their 2nd lien status. Looking back, they might have objected to the plan, but the 29s would have voted in favour - by the same class division they were contesting of course.
- The result would be a material value transfer from the short-dated bonds - the ADJ24s in particular - to the long-dated bonds.
- Whether morally this pari passu treatment is any fairer than upholding the term structure the bonds initially chose for themselves is questionable, perhaps we should refer the surgeon and the judge to a priest. Meanwhile, Adler are playing defence (have to) and unless the AHG and the SteerCo care to work out a truce now, we see the catalyst for a solution closer to summer ’25, when the new money and the ADJ24s mature. A 2025 restructuring under German law looks no more likely than the failed attempt in 2022 and upholding maturities under the UK route has now become complicated.
Here to discuss with you,
Wolfgang