Adler - The balloon within
All,
Please find our updated analysis of Adler here.
In between restructurings, the game is all about the speed with which Adler can sell assets to pay down the New Money - from April, after the make-whole. We do fear some value leakage from left-pocket / right-pocket transactions where New Money creditors stand ready to buy assets in order to have Adler put the money back in their other pocket when paying down debt. By consenting to early deals, Adler saves 12.5% p.a. and could be incentivised to sell low as a result. This does not seem to have occurred on the two deals since the H1 results. In fact, those seem to indicate that there is a market after all and - at least on the surface - bids for the yielding portfolio are not far from book value and therefore 40% above our valuation...
Investment Rationale:
- Following the restructuring we are holding a 3% of NAV position in the New Money and have not yet sold the tiny number 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 their upside is evident. If not, the PIK of the New Money will be eating into the AGPS bond's value too quickly.
- PIKing towards 60% LTV on a look-through basis, the New Money is still very attractively placed, with plenty of value to eat into. So we don't mind too much that it's a PIK. However, downside to the instrument comes from dilution as it will have to absorb the 2nd lien instruments and the ARE ‘26s between now and 2025. In the short term, we are expecting encouraging news flow and we should see some pay-down, crystallising that PIK. In the medium term, however, we will likely be selling this PIK before it begins to balloon.
- The Group level bonds are a bet on interest rates, as well as a speedy liquidation of sufficient assets/redemption of the Fresh Money.
- The ARE '26s are a bet on carrying sufficient nuisance value to hold out and get paid at maturity. This looks like a fair trade, but has nothing to do with fundamentals. So for three-year paper, we find it a tad expensive in the 70s.
- The next event for Adler is the contest of its restructuring in Germany.
The Ballooning PIK:
- We think the PIK is the natural hoover to absorb maturing debt. Its holders are well known to also sit in the AGPS bonds where they are highly exposed to solvency risk. So If your debt at Adler is maturing, just don’t pick up the phone and the PIK holders will “gladly” refi you.
- We think this also goes for the ARE ‘26s, even as the New Money ranks sr. on the Priority Collateral.
- However, the PIK is already PIKing towards 60% LTV (on our V) on a look-through basis and if by 2025 it absorbs the near-term maturities (already announced), the 2LNs and we ear-mark the ARE ‘26s too, then the PIK sits at 75% LTV by the time we all sit down again for the next restructuring.
- Asset sales are supposed to counteract the swelling of the New Money, but unless assets are sold at a premium to our valuation, there will be no LTV deleveraging. We do note, however, that in the last days, the company announced sales proceeds of ~ €200m.
2025 - Round 2:
- Assuming no further changes in valuation (movement could be significant and primarily driven by interest rates), the AGPS bonds will be trying to shuffle into the 25% LTV that are left open behind a however large PIK - which keeps PIKing.
- Maturities following the next restructuring date are set in close proximity to one another, so these bonds will need at least an extension that will push the ‘27s past the ‘29s who might be inclined to hold out again. If so, the process will have to be passed through the courts again and the last deal has yet to survive a challenge in Germany.
- In light of the need to extend the maturities on the bonds, upholding the term structure between them makes increasingly less sense to us. But if the dominant bondholders manage to assume similar positions across the nearer-term bonds, that may still allow them to repay themselves on the short-dated one or two more times before they finally have to level the playing field.
Here to discuss,
Wolfgang
E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk