All,

Please find our updated model on Adler here.

ADJ bonds are down today on an S&P downgrade that comes a year late in our opinion. Still, we didn’t have it on our screens and bought 5 points higher on the 29s. We know some of you have bought the dip today and we think that’s a very good entry point. We’ll have to be prepared for some period of illiquid equity post-conversion, but our model suggests it’ll be well worth the wait.

Investment Rationale:

- We hold 3% of NAV in the New Money 1L PIKs and another 3% of NAV in the 700m ADJ 26s with a view to providing fresh cash in the coming restructuring and holding a pro-rata strip across the Jr. part of Adler's capital structure, including the majority equity.

- We estimate the value of the ADJ bonds to be around 50c/€ today on any mix of valuations such as: 1) Yielding portfolio at 90% of current BV and Consus for free, 2) Yielding portfolio at 85% and Consus at €250m, 3) Yielding portfolio at 80% and Consus at €500m. In the not-too-distant future, with a little bit of rates tightening and a slightly more open German property market we see the value from ADJ bonds (or rather the new securities) at 70c/€ and upwards.

- The ADJ bonds have approx. 30c/€ of downside protection from the yielding assets alone. The Consus assets will take time to recover value. Many of the remaining land plots are in very attractive locations but will require a return of the development market to catch any bid.

- Existing ADJ bondholders will have to give up the majority equity to the substantial €2bn+ of fresh cash that we think Adler needs.

Recap Scenario:

- The aims in our scenario are to (1) bring leverage down to an ambitious 60% LTV, (2) leave the company with a cash war chest to instil market confidence and (3) to simplify the capital structure.

- To do so, we have identified a €1bn need for a new Sr. Sec. facility to sit at 40% LTV and a €1.1bn fresh equity cash need that will procure the majority of the shares of Adler. ADJ bonds would be reinstated with 30c/€ and receive over 1/3 of the new equity.

- To accommodate for the debt write-down, we have reduced the valuation of the Consus land bank and are still ending up with sizeable negative goodwill. However, if the restructuring uses a new topco, which would be our preference, that wouldn't be a problem.

Game Theory - ahead of 2025:

- The New Money is sitting pretty, but is PIKing into the value of the ADJ bonds, who have to do something about it. With audited accounts by Sept. '24, Adler can propose its second restructuring.

- We are still concerned about delayed shareholder claims and would therefore prefer to hive assets into a new structure and leave the old entities behind. After the widespread scandals of 2020, Adler is an unlikely stock to benefit from public listing and the exit is more likely to a competitor or piece by piece when the market has returned. So the public listing is only expensive now. Still, it means we must be prepared to own the equity here for some time.

- All creditors have a strong incentive to keep Adler out of insolvency. The administration process would be endless and the RET-Tax claims crippling.

- The group will require fresh money to take out the New Money, to leave a confidence-inducing war chest cash on the balance sheet and cover oncoming maturities. In the roughest math, we calculate €1bn for the New Money and €1bn split roughly evenly between bank maturities and a remaining cash balance.

- We expect the equity in Adler to be majority-owned by the fresh cash providers and minority-owned by the ADJ bonds through a significant equitisation that will (hopefully) not leave less than 60% LTV.

- €2bn+ is a lot of fresh cash to bring to this situation and double the trading value of the ADJs together. So a solution will likely need the support of the New Money (large x-holdings), which will then continue to be expensive. As such there is a danger that this second restructuring will not achieve a sustainable capital structure for Adler, which would be suboptimal for everyone.

Here to discuss,

Wolfgang

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

Adler - Valuation, Recap Scenario and Investment Considerations