Adler - Not a good deal

All,

Please find our updated analysis of Adler here.

It’s gone wrong. The proposed restructuring does not decrease, but increase the PIK burden on the company, putting it under more, not less pressure to sell its volatile development land bank as soon as possible - i.e. at a low price. As a result - and in line with the general negative sentiment permeating through the architecture of the deal - we are not convinced there will be a rosy future for the Topco bonds or their successor instruments. Having rushed head-long into what we were hoping to be pole position on a great deal, we are likely to retreat almost as swiftly. 

Investment Rationale:

- We hold 3% of NAV in the New Money 1L PIKs and another 3% of NAV in the 700m ADJ 26s. We bought the latter with a view to providing fresh cash in the restructuring and holding a viable equity-like instrument that would be largely fundamentally covered by existing value and also remain so as time goes by. We will therefore likely be selling our ADJ 26s at a loss - confirmation pending a desk-wide discussion and a separate note.

- The increasing, rather than decreasing PIK element ahead of the 2LN ADJ/AGPS bonds or their successor instruments, however, suggests that in our base case the assets will struggle to appreciate fast enough. We are very concerned that the senior instruments will eat into the value of the junior instruments, diminishing the value of our investment. 

- We see the 1LN as value covered and the 1.5LNs too, until in the distant future they could well be taking over the company / its assets if the market does not improve sharply enough.

Restructuring Plan:

- The ADJ SSNs are to deeply subordinate all but €700m of their claims and receive 75% of Adler Group voting rights. Fundamentally this is a fair haircut. The new 2LN notes and the 3LN Perpetuals are to be issued out of a new Dutch Notes SPV.

- The ADJ SSNs are also invited to participate in the refinancing of the 1LN New Money at the same conditions.

- The refinancing of the 1.5 Lien instruments remains the prerogative of the Steerco. 

- Both 1st and 1.5 Lien notes are to be issued out of a new Dutch Facility SPV. 

- Incremental fresh cash is backstopped and will be provided in the form of first lien. The shortfall figure of a further €250m, without which Adler will run out of cash in the base case, will be provided in the form of foregone debt repayment from asset sales.

- The lack of a feature allowing creditors to buy more equity / perps in the structure illustrates the pessimism among ADJ bondholders.

The problem:

- Over the next five years, accepting BV today and at a rate of 3-4% rental growth going forward, a figure we struggle to reconcile in the first place, the Yielding Assets would appreciate by a mere €900m. Meanwhile, the 1L and 1.5L liabilities should be ballooning by €1,4bn. The differential alone accounts for -18c/€ in today’s money on the ADJ/AGPS bonds.

- To merely satisfy the instruments PIKing ahead of them, the ADJ SSNs (in future split between SPV Notes and Perps) will require asset values to grow by an unlikely 8% every year.

- Compare to that the 14.7% write-off the company has taken on its yielding assets in 2022/23. Even if valuations were to return to 2021 level, that would account for only 1.5 years.

- A return of the Consus assets to "average" would provide only another year. 

- Beyond that the rent is rising with max. 3-4% and we already struggle to reconcile that.

Miscellaneous:

- The 2024 proposed restructuring is to be achieved under the bond documentation - as the original 2023 restructuring was initially intended and had come close to. With the 2029 holdout group now on-board, we expect this to succeed. The fallback of another UK restructuring adds further assurance. 

- We are not seeing this restructuring as a success for the 2LN ADJ/AGPS bonds. The resulting structure leaves the company under undiminished pressure to sell off its development assets that ideally would be kept for a little longer to benefit from some more appreciation. 

- Equally, the decision to keep the perpetual bonds on the balance sheet may be tax efficient and allow the odd existing investor to vote in favour of the plan without reflecting the change in their reportings, but this is dearly bought with a balance sheet that will not attract any new investors into the structure until there has been a third restructuring. 

- We expect the second lien holders to eventually take over as their bonds eat into the value of the junior creditors.

Here to discuss with you,

Wolfgang

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