Branicks - Timing
All,
Please find our slightly updated analysis here.
The delayed publication of the FY23 results allowed Branicks to present a better liquidity picture. The structure of Branicks pushes creditors towards consensual restructuring of debts rather than an aggressive court process. The proposed disposal programme will be able to provide the basis of an amend and extend (A&E) proposal, but as the SSNs do not mature until Sep-26 we are not expecting any action soon. The reduction in the Bridge Loan to €160m leaves a current LTV on the stake of 68%. There is no domination agreement between VIB/Branicks, although VIB has provided €200m in secured debt and could buy limited further assets. We are currently updating our model. My apologies for the delay in updating, I have been ill.
Investment Rationale:
- We are maintaining our long position for 3% of NAV in the SUNs, which have risen from 30c/€ to 34c/€ since we entered the trade. The liquidity challenges facing Branicks are still significant, but the German corporate structure makes enforcement very painful for all concerned. We expect the company will use proceeds from asset sales to fund an amend and extend operation for the SUNs. Branicks does not need to rush this as the SUNs mature in September 2026; we expect the amend and extend by 25Q2. In the meantime, the SUNs will rise towards their fair value.
- The upside in the trade is nearly 30 points, and the downside is 15 (assuming a recovery of 20c/€). The downside would come from Creditors enforcing their security rights. A non-consensual process would lead to the liquidation of assets and losses for bank, SUN and Promissory note holders. It is possible but we consider it unlikely that creditors would engage in such an act of self-harm. The downside for the SUNs would be zero, but we have assumed 20c/€ as we would seek to exit as soon as we lost faith that creditors were behaving rationally.
- We have applied a discount to NAV, which indicates a value for the SUNs at 67c/€. In our view, company-reported 'market values' of owned property (based on external appraisals) are well above where the assets would likely trade in the market.
- SUNs holders could be primed by further Senior Secured issuance, but such issuance would be very expensive and likely to trip the ICR maintenance covenant. Bond prices of 34c/€ preclude parri issuance.
2024 maturities have been pushed and liquidity has been improved:
- The €200m Promissory Notes were extended to June 2025, as we expected, and we expect this process to be repeated with further consensual restructuring to avoid an extended and unpredictable court process.
- The €200m bridge facility lenders have agreed to extend (to December 2024) with only a €40m reduction without requiring additional credit support (i.e. no further priming the 2026 bonds). The LTV on the Bridge/VIB equity stake is 69%. If we have reached the nadir for commercial real estate in Germany, we would expect further Bridge reductions to be modest.
- Branicks is planning €500m - €600m in net sales from the Commercial portfolio in 2024; this will help provide liquidity, but given continued weakness in the commercial market, leverage reduction will be modest.
- Our central thesis is that the SUNs (and promissory notes) will be subject to an A&E action to push out the 2026 SUNs and Promissory Notes towards the maturity of the Syndicated Bank Facility (December 2029).
- The Interest Coverage Clause (ICR) was met at the year-end, but even if it had not been, enforcement is not an attractive option for creditors. The interest coverage ratio was >2x, but this excluded costs equivalent to the charge on the bridge loan. Management has refused to provide us with any further details on the calculation.
2024 guidance is for increased asset sales:
- Disposals €650m - €900m (€500m - €600m in the commercial portfolio). Up from <€300m in 2023.
- Acquisitions €150m - €300m, all in the institutional business.
- Gross Rental Income €160m - €175m vs €188m, driven by asset sales.
- Real Estate Management Fees €40m - €50m vs €51m on lower overall activity in the Institutional business.
- The 2025 LTV target is <50%; this will require positive momentum in revaluations.
I look forward to discussing this with you all.
Aengus
T: +44 203 744 7055