Adler - The Playbook
All,
Please find our updated analysis here.
The Q2 results and call did not reveal tremendous news of the company, but they did have two key pieces of information. One is clearly positive for our small existing position, while the other will let us have a debate in the next days as to how to position ourselves further in this name.
€3bn:
- That is apparently the size of the Hengeler Müller x-holder group. Back in Q2 we said that the size of this group would be the biggest driver of value preservation and bondholder upside at Adler.
- Plan A of this group, as far as we know (and agree with), is to avoid a StaRUG scheme and use standard German bond law to vote on what will likely be an expensive amend and extend with some structural changes, but not a fully executed D/E swap. One of the reasons for that is the potential shareholder litigation. It is not clear yet how a successful claim would rank at ADO level, but there is a chance it would sit pari passu with the SUNs.
- Adler called the dialogue with this group “Constructive”, which it should be.
- We are positively surprised by the size of the group, which we see as another queue to buying more exposure.
The Playbook:
- Bondholders are not incentivised to solve all problems at once. As in Steinhoff, the group in negative control would be in pole position to buy assets from a forced seller every time cash is tight in one entity or another. So a solution should leave in place a short leash that can provide such opportunities.
- Adler has enough cash to pay the Consus converts and continue selling assets to satisfy the roll-off of bank debt until April.
- Depending on how it's done, X-holders could provide a new €500m loan to leverage a new SPV under ADO which buys the remaining €1bn of yielding assets out of ARE. That would leave the outstanding €600m ARE bonds exposed to 62.8% of Brack equity and a €500m receivable from ADO level. No further voting required there and effectively a subordination outstanding of the ARE 24s and 26s.
- With 95% of its own assets sold and only a large shareholding in Brack as well as a receivable from ADO remaining, ARE might become increasingly auditable, even if an opinion were qualified.
- If that is still not an option, then ARE bondholders would face the choice between accelerating or waiving. The former would guarantee no pay-out for a long time, but would also put the ADO level in peril (affording ARE bonds a negotiating position vs. the “nasty" ADO bonds). The waiver would have a big sweetener attached, along with an invitation to participate.
- To raise the cash, reduce the maturity wall and also to put a wider agreement in place, Adler could offer bondholders to participate in the fresh financing at a very attractive rate including - probably - a large PIK element and a more attractive, coercive package, bettering their existing position vs. non-participants.
- The PIK-ing debt would then require a solution in a few years’ time when the shareholders have settled their claim - again, Steinhoff is the playbook.
NY law bonds:
- If the company is to stay out of a German StaRUG scheme, then except for the obvious ARE23s, the NY law bonds (ARE 26s and ADO Convertibles) will be the hardest to vote in favour of a consensual plan.
- The NY law bonds require a supermajority of 90% to make significant changes, whereas the German law bonds individually only require 75% (see legal section for details).
- The NY law bonds could be voted to change jurisdiction with a simple majority before then voting them with 75%, but that could take time and even after conversion, the 75% should be harder to achieve.
- In particular, the small 2023 convertible looks like classic hold-out material. Any liquidity in that bond would stir our interest. We’ve last seen it in the mid-60s.
Next asset sales unencumbered:
- While the concrete list of assets under LOI / Exclusivity keeps changing - clearly closing deals is not so easy right now - Adler confirmed that these assets have no direct loan liabilities attached, which suggests the proceeds could be largely used to retire short-term debt at Brack and Consus.
- To the extent the cash would be used at Brack, we doubt it would travel back to ARE in repayment of its affiliate loan to ADO, but think it more likely it would be used to buy assets from Brack in return.
Majority of €3bn:
- Adler confirmed that over half of the over €3bn ADO affiliate loans to Consus have been given via Consus Real Estate AG. This is good news to us, who we were unsure about the extent to which the converts had been leapfrogged in the refinancing.
- To be sure, this is not a fail safe guarantee that the convertibles will be paid, but if anyone is really working on screwing those tiny bonds, then that should at the very least complicate matters.
- Moreover, we expect Adler to have commissioned a IDW S6 restructuring opinion, which would be required for a StaRUG scheme if Plan A fails. We don’t expect such an opinion to be ready before year-end, much less being put to use any earlier than necessary, which again should lend protection to the convertible.
- What makes these bonds (only a little bit) more risky is that Consus is arguably not a material subsidiary of Adler Group. That means that the convertible could default without triggering x-default at ADO level (ARE bonds not involved here), but that looks at best like a tactical consideration. Consus in insolvency would let a German administrator enter the snake pit and that cannot be in anyone’s interest up at ADO.
Positioning:
- We continue to hold our position in the Consus convertibles, but subject to discussion on the desk - and liquidity - are looking to buy the NY-Law converts and bonds at ADO and ARE, as well as longer dated ADO paper in general.
- If the restructuring / amend and extend is going to take place outside of StaRUG, then the NY law bonds require a high 90% super majority to change their terms, making in particular the convertibles a target for a hold-out position. We are not necessarily looking to play the hold-out game at Adler, but it’s generally good to be in the difficult paper.
- A position in the German law bonds could be the most interesting from a medium+ term perspective. But for now we are still working on exactly how to reduce the mountain of fresh cash we’d have to bring to buy everyone out who doesn’t “obey” - i.e. the ARE 23s (pay up - almost), ARE 26s and ADO Convertibles (change jurisdiction), Consus Convertibles (pay up).
Here to discuss,
Wolfgang
E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk