Adler - Which Instrument is best?
All,
Please find our significantly updated analysis here.
Adler finally concluded this second restructuring and the company now has five years to head for the third. The requirement to keep the ADJ bonds outstanding at par (now replaced with SPV Notes) is unfortunate and closes the equity to the wider market. At the sr. end of the cap stack, however, we find plenty to like about the name.
Investment Rationale:
- We continue to hold 3% of NAV in the New Money 1L PIKs but are looking to sell our 3% of NAV in the SPV Notes (strip). We were unable to sell the ADJ 27 going into the restructuring, given our view that the new notes will be challenged. We should be seeing two minor positive catalysts in the foreseeable future: the publication of audited accounts and the first post-reorg financials. However, we would prefer to sell into these events as from there onwards we are concerned the bid will drop off significantly. We are just waiting to see a more reliable price.
- 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 enough.
- In the short term, Adler will be paying down the 1L New Money with whatever cash they can raise and any refinancing options - subject to a £250m hold-back. So the return on this leg of investment will likely be a little lower than the 12.5% headline. Still, we like the return at 60% of LTV and will hold on to this position. Risk to this position comes from the sale of Brack and of Consus assets to pay down the New Money. However, Brack should not weigh so heavily and we don't think Adler are ready to fire-sale their assets for this. After all, that's what the five years are supposed to be for.
- We have not yet seen any movement in the 1.5L Notes. We find these priced relatively tightly for the 20% increase in TLV.
- In the coing years, the high PIK burdon on the debt structure will drive the SPV bonds further out of the money, which is why we are sellers here.
Restructuring:
- The restructuring has now become effective and the new instruments have been launched. Safe for the two 1.5 Lien pieces the calculations are straight forward now.
- Come next week, we should have audited financials for Adler, which should also make the name more palatable for many investors.
- The restructuring unfortunately left €2.3bn of convertibles outstanding at par. The instrument should be classified as sr. equity, but it distorts the balance sheet. We would have preferred a cleaner structure that would carry some allure to the wider market.
Key Value Drivers:
- Rates: If Adler can find a way to refinance its 1L New Money the 2L SPV notes stand a much better chance in 2028. For reference, after pay-downs from Brack and Consus, we see the interest cost of such debt at €50m if Adler can refinance 60% of LTV at 3.5%, which is out of the question in the short to medium term. Naturally, rates drive asset values too.
- The return of development in Germany could strongly drive value in Consus. While the land bank produces no cash flow, it is the most sensitive to the recovery of the market.
- The publication of audited accounts in the coming days should re-instill confidence in the name - despite its butchered equity (perps) arrangement.
Key Risks:
- Our model rests significantly on rental growth, but we cannot reconcile the yielding assets' LfL growth shown in the company's presentation (5.1%) with the growth of the rent/m2 shown year over year in its financials (0.7%). We are aware that during the period several assets have been sold and reclassified, but we wonder how those could be significant enough to account for such a drastic difference.
- Adler is merely setup to enter a third restructuring in 2028 in which the 2LNs could take over.
- Adler will be keen to pay down and refinance as much of the 1L New Money as possible. We see limited opportunity in the short term and thereafter consider it a bet on rates. It will likely limit the return on that position - if only a little.
- We could be overestimating the Consus value. We are valuing the consus assets with some €875m. Valuation of what is mostly a land bank is very uncertain, but there are assets that carry some significant value and where we know of a low-ball bid (not accepted by Adler) and extrapolate the discount across similar assets, we are not far off our valuation.
Happy to Discuss,
Wolfgang
E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk