Vivion - Looking again - Positioning
All,
Please find our unchanged analysis here.
Vivion has enough cash and access to liquidity to make the €183m August repayment. With no further bond repayments due until August 2028, Vivion will have the time to benefit from the coming rate reduction (and cap rate reductions) in Germany and the UK. Our analysis shows the asset valuation covers the bonds, and we expect the LTV to improve slowly along with valuations recovering. Our investment is driven by the attractive yield rather than the expectation of a quick refinance.
Investment Rationale:
- We are taking a 3.5% NAV position now at 85c/€ and intend to take a further 3.5% after the FY 2023 results (due at the end of April). The YTW on the position is 11.5% with a further 1.25% (rising by 25bp a year) PIK. We view this as a yield play as we do not anticipate a quick refinance.
- There is plenty of covenant headroom: LTV on our valuation was 52% in Jun 2023. Covenant maximum LTV is 60%, with actual (calculated by the docs) 32%. The maintenance ICR is 1.8x, and we expect a figure of just >2.0x for the year-end. This ratio will constrain the amount of high coupon debt that Vivion can afford and incentivise the company to dispose of assets.
- UK hotel cap rates have stabilised, and we expect the same will happen in Germany over 2024. Falls in € rates will help stabilise German office cap rates. Our valuation of the assets is already 7% beneath the company’s (as of Jun 2023).
- The August 2024 maturity of €183m will be met with cash on hand and the proceeds from debt or asset sales. The Dayan family will not risk losing control of the Vivion assets for €183m. Net assets at June 2023 were €1.7bn (fully consolidated basis).
- If the Dayan family choose to allow the business to default in August, the downside for the 2028s is 20 points.
- We sold our previous position in the 2024 bonds when the Amend and Extend operation was completed in August 2023. We see now as the right time to step into the longer-dated notes.
German CRE is still challenging but will start to ease; UK hotels are more robust:
- Vivion has survived the worst of the German CRE widening.
- € rates have peaked. The fall in rates will be slow, but it will happen, and this will further underpin valuations.
- Our analysis has the bonds fully covered by the assets. Once the 2024 maturity has been paid, Vivion will be in control of its destiny.
- The UK hotel market saw cap rates rise along with interest rates, but valuations have been supported by stronger operational performance in the sector.
- UK rates will fall as inflation reduces. Again, the rate reductions are slower than hoped but will begin late in the year.
Vivion has the liquidity to make the August 24 maturity:
- Vivion needs €183m in liquidity and has >€100m in cash in the Vivion Investments Sarl level.
- Raise debt in the UK: In the UK, the company has €1.5bn of assets with no senior bank debt. If Vivion borrowed €200m against these assets, the LTV/Secured debt would only be 22%. Our analysis would have interest cover falling to 1.9x (from 2.5x), assuming a cost of 7.5%. We think this is the most likely option. The swing factor here will be the 1.8x Interest Coverage Maintenance covenant. Our analysis shows Vivion meeting that covenant, even with higher interest payments. However, management may choose asset sales and cash if it has concerns.
- Sell UK assets: The M&G loan is attached to the former ribbon assets, which we estimate as worth at least €400m. We also expect the M&G finance to be stapled. Vivion could dispose of these assets without needing to refinance.
- Upstream further cash from Germany: we estimate €450 of cash remains in the German asset vehicle. The LTV ratio in Germany is c30%, so a further €150m could be raised whilst staying below 40% LTV. Despite the 49% cash leakage to co-investors, Vivion upstreamed cash from this vehicle to fund the amend and extend operation.
- Sell German assets: We see this as less likely than the other options, given the weakness in German Commercial Real Estate and the leakage from any sale.
I look forward to discussing this with you all,
Aengus
T: +44 203 744 7055