Vivion – To pick a nude's pocket
All,
Please find our unchanged analysis here.
We have seen Vivion bonds marked lower in recent days after a sell-side report apparently suggested the company may see a delay in receiving cash due from Aggregate Holdings regarding Vivion’s remaining €350m exposure to the Fürst project in Berlin. If that is so, the report may be misguided and depending on the conclusions it draws there may be some nuances worth noting. We are very relaxed about the prospect of a weak Aggregate looking to negotiate terms. Fürst is a landmark development in the strong Berlin real estate market so we see buyers. Vivion doesn’t need the cash right now and with banks charging to take deposits, getting some additional economics by allowing Aggregate more time to place the bonds would be an attractive piece of business. We see a maximum downside for Vivion as being <€25m. With both Vivion the bonds yielding below 4% they don’t fit our mandate and we don’t expect investors to panic and push Vivion’s bonds much lower.
Vivion’s Exposure:
- Project Bond exposure of €362m (per October). This is part of a 3.5% BBB rated bond and the most sr. in the Fürst project capital structure. The project is fully financed, including a large CapEx reserve and an interest reserve. Some minor re-design is under way to reduce the commercial space - post Covid.
- At some 60% LTV of the project, it is well protected and under normal circumstances would find a buyer quite easily. Now however, that the developer is under pressure, we understand from German market participants that a yield of 4-4.2% might be more appropriate. The resulting discount is the value at stake.
- Aggregate appear to have committed to selling this bond for Vivion in the market and also to have guaranteed par or near par. As a result, Aggregate seems not to be dumping it into the market at a discount, although observers say they notice the odd transaction of approx. €10m at a time, implying that the residual exposure today is lower.
Vivion’s Security:
- We understand that Vivion hold a share pledge on the project equity and Aggregate seem to have guaranteed the sale of the bonds. To what extent Vivion also hold a Put to Aggregate for full cash payment is not known to us, but they might and for now we must assume so.
- In the simplest terms, Vivion would - if they wanted - take the shares back and presumably sell the project to some other (likely lower) bidder. If that bidder is financially stronger than Aggregate, this might then return the bond to par. The loss generated by a potentially lower sales price to a third party would presumably be borne by Aggregate, who funded the purchase with a €250m bond issued out of holdco.
- So, in theory, Vivion would have nothing to lose and could rid themselves of their association with troubled Aggregate.
Vivion’s Dilemma:
- As has become overwhelmingly clear to anyone in the last months, German Real Estate is a very small world - much smaller even than London HY for instance. Should any action by Vivion send Aggregate into administration, the ripple effect throughout the market would cause disproportionate damage, not only to Vivion’s own securities, but also to anyone else Vivion does business with. Vivion’s ability to agree to similar terms in the future would likely be much diminished.
- Aggregate has bid Vivion an excellent price for Fürst and previous transactions have also been good business for the Dayans.
- As a caveat, the above ripple effect through the market may have its short-term attractions to a company running a €1bn cash pile, but the damage would probably linger for some time and at least the Dayan’s past conduct does not strike us as irresponsibly aggressive.
Aggregate’s Risk:
- At an extreme, Aggregate could of course lose control over the Fürst, lose its equity invested in it (although that would likely have come in as Interco loan and Aggregate would have a claim somewhere) - and still be on the hook for cash to replace Vivion’s bonds in it.
- A loss of its equity investment in the Fürst would be lethal for Aggregate. This could happen if Vivion sell it on at a lower price. Aggregate’s best defence right now would be its own vulnerability, see Vivian’s Dilemma above.
- A loss of control over the Fürst project - provided Aggregate retain the economics of their equity cheque - might just drop Aggregate’s leverage ratio. But would not solve Vivion’s ostensible quest for cash.
- Enforcing any guarantee or put of the bonds to Aggregate might lead to the latter entering administration, in which case that would also not achieve Vivion’s aims.
What’s fastest for Vivion is also the best for Aggregate:
- Without doubt, the fastest and best solution for both parties is to continue to work together, i.e. that Aggregate receive more time to sell Vivion’s bonds. That might mean that Aggregate will have to fund the discount, but the discount is relatively minor and unless Vivion really want all that cash at negative rates, it may all be good business to them.
- A continued collaboration of both companies is by far the most likely scenario to play out over the next months. Aggregate will be hoping that audit and legal reviews at Adler and itself can be published within Q1, which they must believe will go some way towards narrowing such discounts.
Investment Considerations:
- Yielding 4% the upside in Vivion's bonds remains negligible and not attractive enough for us. The most tangible short-term event that might change this is an insolvency of Aggregate.
We look forward to discussing this and exchanging ideas with you.
Regards,
Aengus