Vivion - Micro to Macro
All,
Please Find our updated analysis here.
Vivion’s portfolio valuations are now in line with our model. We expect yields to stabilise through 2024. The German Real Estate market will benefit from the ECB cutting rates as inflation falls. UK Hotels have already seen yields stabilise as occupancy rates (and room rates) recovered. Vivion will need to raise some cash to repay its August bond maturity, but it has unencumbered assets in the UK that the Dayan family can monetise. Sourcing paper in what is now a macro play on UK/German real estate may be a challenge as investors who have taken the pain will want to hold.
Investment Considerations:
-We have a 3.5% NAV position now at 89c/€. The YTW on the position is 10% 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. We are now considering an exit as feedback from clients indicates that despite their size there is little liquidity in the bonds meaning clients will struggle to follow the trade.
- 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.
- 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 Dec 2023 were €1.6bn (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.
Vivion will need to raise c€200m to redeem the 2024 bonds:
- Vivion will need to raise cash to make the €183m maturity, but it has over €2bn of UK assets with only €230m of debt attached. A sale of some of the hotels is the neatest solution, but nothing firm has come from the company.
- Vivion has used a group of its hotels as collateral to secure a €230m M&G loan. Assuming 40% LTV, the implied value is well over €500m. We expect the M&G loan hotels will be sold with the loan in place. Additional to the collateral assets, the UK silo has €1.6bn of unencumbered assets.
- Year-end cash was 67m at Vivion Investments, but we expect the minimum required cash levels to be around €50m.
- There is €430m held at Golden Partners, of which €219m is attributable to Vivion. We do not expect Vivion to want to use that cash due to the 49% leakage.
Portfolio valuation is now in line with our model:
- Our valuation of the portfolio is now close to that of Vivion. LTV has increased to c58% from 55% at the Vivion Investments level but is still manageable. The bond LTV covenant is calculated on a fully consolidated basis (including 100% of the Golden Partners assets) and is much lower. Asset impairments continued in 2023, but 2024 should be better:
- Vivion took €300m of charges against its German portfolio last year, whereas the UK portfolio was marked fractionally higher.
- We expect that German yields will be stable this year with the possibility of some modest decrease in the UK.
I look forward to discussing this with you all.
Aengus
T: +44 203 744 7055