Aggregate - Thoughts
All,
Please refer to our unchanged analysis here.
Judging by the late press release, Aggregate were taken by surprise. At first sight, it’s just a netting. But then there are consequences. The positives are imminent, the negatives could be bigger.
What happened:
- Vonovia called the margin loan on Aggregate’s shares in Adler. Vonovia have been after Adler for some time, as the recent board appointment underlined.
- The exchange has taken place by way of a Pfandverwertung, i.e. loan enforcement and taking possession of security. This means that the entire €250m JMP margin loan is therefore off Aggregate’s books.
- The loan is fully satisfied and there is no recourse or other direct consequence arising to Aggregate from this event.
Valuation:
- From a valuation perspective it’s a zero-sum game. The exchange has taken place at market value, which amounts to a netting of assets and liabilities on that position.
- The enforcement removes an upside option to aggregate, which it had half sold anyhow via the call agreement it had separately signed with Vonovia.
Consequences:
- X-Default: Was the Adler subsidiary material? It looked material in the presentations and initially represented a bigger cash equity stake than Aggregate has in Fürst for instance. The 2025 bonds prospectus stipulates that failure to pay by a material subsidiary of amounts exceeding €100m constitutes a default.
- From the Prospectus:
"Material Subsidiary” means a Subsidiary of the Issuer whose total assets exceed 10 % of the consolidated total assets of the Issuer, where the threshold shall be calculated on the basis of the last audited or, in case of half-yearly accounts, unaudited consolidated financial statements of the Issuer in accordance with IFRS and in the last audited (if available) or (if unavailable) unaudited unconsolidated financial statements of the Subsidiary.
- From the half-year accounts:
- Total Assets: €8.3bn
- Adler stake: €958m
- So going by the half year accounts, Aggregate appear to have a problem. As I write this, however, Aggregate are out with a statement debating that, although without further detail.
- Covenant breaches: The exchange at market value should trigger a write-off at Aggregate for the acquisition value of the stake less corrections already taken. This could lead to a breach of the LTV covenant of 65% and possibly the Interest Coverage covenant, which requires 1.5x interest held in marketable securities. Note that breach of these covenants does not constitute a default under the 2025 SSNs.
- Liquidity: The enforcement frees up the remaining 6.1% = €60m share package in Adler for Aggregate to sell and raise liquidity for its other negotiations (should be enough to deal with the Vivion situation, or to pay interest etc.).
Signalling:
- Presumably, Vonovia could have extended the loan if it had wanted to. The timing is therefore likely deliberate.
- Positive for Adler: Vonovia may be coming to the conclusion that KPMG will come to a positive verdict and that therefore Adler prices may be at their lowest now. So it could be economically a good time to enforce the loan.
- Negative for Aggregate: Vonovia may be concerned about an imminent insolvency at Aggregate and is seeking to perfect the acquisition of these shares at market price before having to deal with an administrator. Given the type of security Vonovia held over the shares, that would have been a limited threat, but if it’s imminent, maybe it's just easier. Against that view counts the freeing up of €60m of Adler shares for Aggregate to sell freely.
- Negative for Aggregate: Vonovia may be coming to the conclusion that the takeover sequence by which Aggregate have acquired their stake in Adler will be deemed illegal and is therefore looking to perfect this trade before prosecutors move in.
- Negative for Aggregate: If it wasn’t clear before, Aggregate did not have €250m of spare liquidity to pay down the loan. That is at least visible now.
- Negative for Aggregate: The move by Vonovia was clearly not agreed by Aggregate.
Positioning:
- At 50c/€, Aggregate SSNs reflect full value for QH, Fürst and the VIC and nothing else - for instance. We think the Portuguese projects should be refinanceable, but that will have just become yet more difficult. To what extent its other FREA assets have any value is hard to say. We have not been ascribing much.
- We’ve lost 70bps in NAV today as a consequence of the drop in the SSNs, half offset by a gain of some 40bps in the Adler shares we recently bought. Ouch. When we bought these notes at 70 last year, we were expecting Aggregate to work through its problems more swiftly than it does. Since then, there has been no fundamental shift at the company except for this netting/enforcement and ts sale of S-Immo.
- From here, Aggregate have more liquidity, but also another spanner in the works - at least. The news should disrupt any ongoing efforts to refinance the VIC and to find a timely buyer for the Fürst SSNs. Perhaps it can use the additional liquidity to bring one or the other of these tasks over the line. It would restore much confidence.
- From a long-term perspective little has changed, but in the short term, risks have clearly become skewed to the downside. As a result, we may be selling some of our position in the days to come.
- Whether or not the enforcement triggers the 2025 SSNs will be a matter of close scrutiny.
Wolfgang
E: wfelix@sarria.co.uk
T: +44 203 744 7003