DIC Asset - Testing the Foundations
All,
Please find our analysis here.
We view company-reported market values of the property assets, which are based on external appraisals, as being significantly above where the assets would likely trade at in the market: our base case valuation estimates of the standalone DIC Asset/VIB level assets are c.40%/c.30% below reported MV respectively. Under the current capital structure, our base case recovery on the 2026 bonds is in the mid-to-high 70s, and this doesn't account for any priming resulting from temporally senior (but otherwise pari passu) debt at the DIC Asset holdco level, under the company's current maturity schedule. Therefore we would only consider buying the 2026 bonds at a price below 50.
While in theory there might be the possibility of some (incidental) value transfer from VIB to DIC Asset (resulting from VIB acquiring assets from DIC Asset to aid with the latter's refinancing), it seems unlikely that such value transfer, if it did so occur, would increase 2026 bond recovery enough to justify being long at the current bond price.
Investment considerations
- We won't be taking a position in the 2026 notes at current levels; we would look for an entry price of below 50.
- While we think the 2023s are overvalued given liquidity needs through FY23 seem only just covered at best (at the DIC Asset level), our analyses focuses on the 2026 bonds.
- We view company-reported 'market values' of owned property (based on external appraisals) as being significantly above where the assets would likely trade at in the market: our base case valuation estimates of the standalone DIC Asset/VIB level assets are c.40%/c.30% below reported MV respectively.
- Under the current cap structure/waterfall, our base case recovery estimate is only in the mid to high 70s for the 2026 bonds, and we see significant risk of priming given significant unsecured debt maturities at the DIC Asset level through 2026 (the majority of which occurs by year-end FY24) and already high leverage at the DIC Asset level (thereby preventing material pari debt issuance).
- On the upside: it's possible that the €400m 2024 bridge facility lenders agree to extend without requiring additional credit support (i.e. without priming the 2026 bonds); moreover, purely speculatively / hypothetically speaking, we think it might be possible that at least a portion of DIC Asset level liquidity needs are met via disposals of some of DIC Asset's properties to VIB, and to the extent these disposals are done at valuations above our base case valuation estimates, 2026 bond recovery could thus be improved.
- However, even if we assume both scenarios, we still arrive at significantly below-par recovery for the 2026 bonds, i.e. assuming both a) the bridge loan is extended and remains pari with the 2026 bonds, and b) acquisitions by VIB of DIC Asset properties at an overvaluation relative to our base case.
- It's possible that DIC Asset AG is unable to raise enough cash to meet DIC Asset level maturities, and in which case a restructuring or insolvency could take place in the nearer term (and prior to significant priming of the 2026 bonds); but as mentioned, we would still expect a recovery significantly below par in this scenario for the 2026 bonds, and recovering this value could take years in practice.
Valuation
- The substantial majority of the group's value derives from its directly owned property assets and its stake in VIB.
- Forming a robust view thereof is made difficult by a lack of available information on the majority of the DIC Asset level portfolio, and a currently highly illiquid investment market generally.
- We think it is reasonable to assume below-prime asset quality on average across the owned portfolio; indeed the company has stated that the average quality of its owned portfolio is generally below that of the 3rd party assets it manages in its Institutional Business. Additionally, we have no visibility on capex requirements.
- Thus, we view company-reported market/fair value of the property assets (which are based on external appraisals) as being significantly above where the assets would likely trade at in the market.
- Our base case valuation is based on a 6.5% Net Initial Yield for the VIB level assets and approximately 6.2% Net Initial Yield at the DIC Asset level.
- On the Institutional Business side, our EV estimate for the group's Institutional Business is c.€280m, representing a significant discount to company-calculated EV of c.€522m; we think this is sensible given a significant proportion of the Institutional Business' revenue historically comprised transaction driven fees which unlikely represent normalised levels.
- We would also note the general opaqueness of the group in our view, which is reflected in our valuation estimates and overall investment view, in particular with respect to related party transactions, and the relationship between DIC Asset's own balance sheet and the Institutional Business.
- While a credit event prior to the 2026 bond maturity is possible (and we have assessed recovery prospects in such a scenario), our recovery/coverage analysis focuses on FY26 by which time DIC Asset's maturities will need to have been addressed. We have looked at bond recovery with and without significant hypothetical asset disposals by DIC Asset to VIB (and at an overvaluation relative to our base case), but under both scenarios, we arrive at significantly below-par recovery.
Liquidity
- The company faces significant debt maturities at the DIC Asset level in the near-term with €150m due on the Oct-2023 bond, and then €400m due on the unsecured bridge loan in Jan-2024 (issued at the DIC Asset AG holdco level according to the company), along with c.€225m in Promissory Notes and c.€90m in secured bank debt due in FY24, based on approximate estimates.
- DIC Asset's existing cash balance and undrawn committed facilities are clearly insufficient to meet its liquidity needs.
- At the same time, high leverage will likely limit new debt issuance at the DIC Asset level to insufficient levels.
- Refi needs could be reduced via an extension of the €400m bridge loan, and of asset-level secured debt, but not completely, and we think extending the promissory notes (a large proportion of which appear to be in the form of Schuldschein) consensually would be challenging as unanimous consent would effectively be required in most cases.
- Thus, in the absence of significant disposals to 3rd party buyers which we expect to be challenging given current investment market conditions, we expect DIC Asset will need cash to be upstreamed from VIB.
- Hypothetically speaking, possible options might include upstreaming cash in the form of loans and/or asset acquisitions by VIB from DIC Asset, as well as asset-for-VIB-stock transfers and dividend distributions (with the latter being unlikely in my view given the requirement to pay minority VIB shareholders on a pro-rata basis). As for an equity raise, executing such a transaction would be very challenging given current market conditions, however, this shouldn't be ruled out entirely.
Recovery analysis
- Our base case estimate is for a recovery for the 2026 bonds in the mid-to-high 70s under the current capital structure (before accounting for priming prior to the 2026 maturity), and c.50c recovery in 2026 which hypothetically assumes all refi needs can be and are met using priming debt. And while recovery could move up or down depending on if and how cash is upstreamed from VIB to DIC Asset (e.g. via acquisitions, or loans), how the bridge loan is addressed, and Institutional Business EV, we don’t see the bonds recovering par in any event under our base case property valuation assumptions.
Edward
E: elewisohn@sarria.co.uk
T: +44 203 192 0200