Sarria: Adler - Structure, winners and losers
All,
Please find our unchanged analysis here.
We will be assessing prices and liquidity on Monday morning to see where we can get exposure, in particular to ADO. We meant to buy our exposure ahead of any agreement, but this has come faster than we thought. The overall architecture is substantially as anticipated however and so we intend to move swiftly now - market permitting.
The structure of the proposal:
- Holders of 45% of ADJ bonds and an unspecified proportion of ARE 24s and 26s are to inject fresh cash of up to €937.5m of fresh cash via Sr. Sec. Loan Facilities into either ADJ itself or - more likely - into a new Luxembourg subsidiary which is to be created to hold ADJ’s assets. (The precise security has not been specified (see below) but it should include anything and everything still unencumbered and second lien where available (although there are limits on over-securing loans in Germany, some of the security may be held in entities outside the country - notably Luxembourg).
- Of that, €800m will be on-lent to ARE (partially in repayment of the Interco (affiliate) loan from ARE to ADJ of €265m so as to fund the maturities of the ARE 23s and 24s. Some €57.5m will cover OID and fees.
- The ADJ 2024s are to extend by a year and in return receive 2nd ranking status behind the fresh cash and before the remaining ADJ bonds.
- The ARE 24s and 26s need to consent to ARE providing security to the PIK portion of the new money that is to be on-lent into ARE to repay the 23s and 24s. This makes no sense on its own, as the hassle is too big for the little benefit. So we think (always thought) it safe to assume that the ARE assets will be the at centre of security provided to the new financing (alongside the ADO portfolio).
Who benefits:
- The fresh cash Loan Facilities will be highly attractive, earning 12.5% PIK, come with 1% OID and will include secured warrants worth 25% of ADJ equity. We want this.
- Consus 22s, ARE 23s and ADJ convertibles will mature regularly - receive par. We expect there to be a degree of round-tripping of cash provided by the x-holders to repay these facilities - significantly held by the same, but also the K&E group can expect to be cashed out at maturity in April.
- The ARE 24s and 26s (the only outstanding after the 23s will be repaid) will be voting to receive security. Their collateral is likely not the same as the collateral securing the fresh cash, but we have no detail on that.
- The ADJ Convertibles, small Schuldscheine and the ADJ 24s in return for extending maturity will receive 2nd lien status.
- ADJ bonds voting in favour of the agreement will receive a package of subsidiary guarantees as well as security including the shares in the new Luxembourg entity that will hold ADJ’s assets. They will be layering any hold-outs in ADJ bonds, which is a highly coercive element and the reason we are confident the restructuring will succeed (see previous writings). The incremental PIK coupon of 2.75% only goes so far, but at the price this paper is trading, significant upside will come from mere recovery.
- Smaller bondholders will be able to participate in the restructuring as the X-holder group on its own is nowhere near big enough to vote on the restructuring. (Note, however, that WpHG voting takes place on the quora present at the relevant meetings, not on principal outstanding).
- Shareholders (?) are being diluted with 25% warrants and a reduction in the CoC threshold to 33% is clearly designed to keep Cevdet Caner or any other potential suitor at bay. Moreover, the future debt pile will be piking at a high rate, eating into the equity. But the shares are not being diluted any further (yet) and the restructuring saves them a certain option value on German RE.
Who loses:
- Shareholder claimants. Wirecard shareholder claimants have just lost in a bid to achieve sr. unsecured status at the AG. Even if a verdict in Adler would hand such claimants a sr. unsecured claim, the bondholders will be justifiably sr. secured by that time. Also, ADJ are handing out warrants worth 25%, which dilutes the shares.
- Anyone not consenting will get layered. Depending on how directly consent is linked to providing fresh cash (we think not), then that could include anyone unable to provide fresh cash. Again, we think not as this would jeopardise attaining a large enough majority in each ADO bond.
Positioning:
- We are anticipating the repayment of our Consus 22s. We were originally intending to recycle the cash into other bonds, but we’ve gotten surprised by the speed of events. We thought we’d struggle to be here by Christmas.
- Depending on trading in the bonds on Monday, we will be looking to buy 5% in the ADJ bonds. We are assuming the ARE 24s and 26s will be too tight as well as the ADJ 24s receiving 2nd lien status. So we are probably looking at the ADJ 26s.
- We will be looking to participate in the fresh cash.
- Tomorrow, we may see some early forced sellers but are expecting new buyers to significantly outweigh and to bid up the entire structure. If not, great!
Wolfgang
E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk