Vivion Investments – Quantifying Aggregate Exposure
All,
Please find our unchanged analysis here.
So how significant is any damage to Vivion from the fall-out at Aggregate Holdings post the allegations made against Adler Group? Having spoken with management, we see the impact as negative but manageable. We have been told that the Aggregate bond holding is not €220m but covers bonds from 30 companies. The €487m “receivable” in the deal is a Project Bond (illiquid but tradable), secured on the Fuerst assets and the equity in the SPV. Vivion has been able to sell €137m of this bond already and expects to exit by June 2022. The funding for the completion of the Fuerst project is already in place and a sale of the SPV by Aggregate is a more credible option than default, given the iconic status of the K’damm development in Berlin.
What exposure does Vivion have to Aggregate?
- As part of the payment for the Fuerst assets Vivion took interest-bearing instruments rather than cash for the majority of the proceeds. This has been explained as a desire to minimize the impact of negative interest rates on cash balances. It is credible given €1bn of cash holdings.
- Vivion received €487m in a project bond. Although illiquid, this is a tradeable instrument (with an ISIN), issued by the SPV and secured over the assets and the shares of the SPV. Vivion’s holding is now down to €350m.
- Vivion also received €220m in liquid securities. Our understanding is that this was initially funded by a tap of existing Aggregate bonds. We have assumed that the bonds were placed directly with Vivion. Vivion has confirmed holdings of €220m in liquid securities but has said they are spread amongst 30 different companies.
What is the impact on Vivion?
- Project Bond: The Fuerst complex is one of the most well known in Berlin, which in turn is the hottest of the German real estate markets. Vivion has already disposed of €137m of the project bond demonstrating the “marketability” of the bonds, and management confirmed that they expected to be fully disposed by June 22. The project bonds have a 3% coupon and mature in June 23. At the time of the sale there was already finance in place to complete the project (€1bn in loans and €250m in a capex reserve line). We would not expect the price impact to be more than 5 points or under €20m. We do not see default as likely, a flipping of the asset by Aggregate is more credible.
- Marketable securities: We had assumed that Vivion held €220m of Aggregate bonds. However, management informed us this morning that, beyond the Project Bond, Vivion have no further exposure to Aggregate and/or Adler and that the remaining marketable securities that Vivion received in the deal is spread across some 30 different securities (presumably not Aggregate / Adler securities).
- Meanwhile, we have heard from Aggregate management that the €100m bond tap in August was at least partially done in kind and had something to do with the Fuerst acquisition.
- For lack of better information therefore, we assume that Vivion took the entire €100m tap and must have sold its stake since. So the maximum loss sustained on that investment would have been €33m. On top of that, we assume that the remaining €120m of marketable securities will have been at the very least thematically related to real estate and are therefore provisioning another loss of 10 points (should do it) and therefore another loss of €12m.
- Maximum Loss: So the maximum loss sustained at this point from the transaction - as far as attributable to Adler / Aggregate would be €20m from the sr. bond + €50m from marketable securities = €70m.
- In the context of €1bn of balance sheet cash, the assets to be liquidated and the headroom on the LTV, a regrettable €70m loss is peanuts.
Why was the deal structured this way?
- Vivion has €1bn of cash and another €1bn of cash from Fuerst would have left it with negative carrying costs due to negative interest rates.
- They know and like the Berlin assets.
- Vivion never intended to develop the 40k sqm of development space. It was always held as an asset for sale (€374m in the balance sheet). Aggregate was interested in both the buildings and the development as a single purchase.
- The sale of parts of the Project Bond and the marketable securities also matches Vivion’s investment plans. The company expects €250m - €350m of investments (in Germany and mainly offices) to be announced by the end of 2021. With the remaining Fuerst proceeds to fund a further €220m - €330m in 2022.
Investment Considerations:
- With the bonds having come down into the 93c/€ area, we are beginning to think of Vivion as a potential long. The yield is tight for our mandate, but such an investment would be predicated on returning to the tights it has seen before.
- We chose not to short the Vivion SUNs and despite the recent noise around German real estate that has not changed. We understand the rationale behind the way Vivion/Aggregate structured the Fuerst deal and see the potential direct Aggregate exposure as manageable. We have been unable to confirm the thesis that property valuations would be materially inflated because of the pandemic and certain sales of assets and operations over the last two years. In fact tightening yields pushed valuations marginally higher.
- Risk to the SUNs continues to come primarily from a potential management decision to buy out its co-investors in Golden at dilutive prices, using cash on balance sheet and thereby leveraging up Vivion and with that the SUNs. However, the wait for the Fuerst cash is likely to delay the process of levering up Golden, or of Vivion buying out the partners.
We look forward to discussing this and exchanging ideas with you
Regards,
Aengus
E: amcmahon@sarria.co.uk
T: +44 203 744 7055