Adler - Extent of x-g'teed, x-collateralised debt
All,
Please find our unchanged analysis here.
When the subject of x-guarantees initially moved into focus, we went back through all publications since the merger to try and identify which loans could be guaranteed by ARE and ADO for instance, potentially leading to a double-dip and to alterations in recovery at one or the other end. Since some of you have been asking and the company did not comment further on questions in this direction, we have refreshed that work and to our surprise, find that we interpret some things differently today.
Sources of information:
- The ADO listing prospectus shed some relatively detailed light on a number of arrangements.
- Quarterly and annual accounts give an overview of some of the larger loans raised and repaid since the merger and before.
- The recent Supplementary slides to the Q421 presentation made an interesting comment on page 9: "Cross guarantees are in place for certain financial secured debt, where subsidiaries of Adler RE and Adler Group borrow under the same loan agreement and are subject to a collective land charge. Furthermore, Adler Group has issued a letter of comfort for a project loan on Consus level."
- We have in particular been looking for secured loans received following the merger as before the merger there would have been little scope for cross collateralisation - at least between ADO and ARE, where it matters most.
Secured loans mentioned since merger:
- €400m from LBBW to Westgrund in March 21. This loan replaced another loan of approx. €190m.
- €100m under an “existing programme” around the same time as the loan above. We know little about this loan and it is currently too small to matter a great deal.
- However, it turns out that about every major entity had "Cross guarantees ... in place for certain financial secured debt, where subsidiaries (of that entity) ... borrow under the same loan agreement and are subject to a collective land charge.” In fact, when re-reading above page 9 statement, we are not sure it really means to say that there are major agreements x-g'teed and x-collateralised between both ARE and ADO at all. For our calculations, x’glees and collateralisations make no difference (yet) where they are confined to subsidiaries of either ADO or Westgrund, or Brack, or elsewhere.
Speculation:
- If there is one loan that could lead to a double-dip / x-default between ARE and ADO, it’s most likely the €400m loan from LBBW:
- In April 2021, a month after Adler say the loan has been given, a DLA Piper made the publication below. The involvement of DLA piper suggests the loan was more complicated than is usually the case: https://globallegalchronicle.com/landesbank-baden-wurttembergs-e400-million-financing-of-a-adlers-residential-property-portfolio/. Note that the portfolio in question is located throughout the country and that DLA Piper - perhaps to keep things simple - make reference to Adler Group and not just to Westgrund. Because there is no other loan mentioned in the Adler documentation, however, we believe this to be the same loan as described in the 2021 quarterly financials.
- The loan replaced a previous smaller arrangement, which we believe to be this one, described in the ADO listing prospectus:
"2014 Loan Agreement with LBBW (Berlinovo)
On December 19, 2014, Westgrund Wolfsburg GmbH, Westgrund Niedersachsen Nord GmbH, Westgrund Niedersachsen Süd GmbH, Westgrund Brandenburg GmbH Westgrund VII. GmbH, WAG Görlitz GmbH and WAG Neubrandenburg GmbH as borrowers entered into a loan agreement with LBBW as lender with respect to a principal amount of up to €297 million in connection with a portfolio acquisition. The non-revolving loan amount is divided into a fixed-interest tranche in an aggregate principal amount of €272.8 million with an interest rate of 2.14% p.a. (“Tranche A”) and a variable-interest tranche in an aggregate principal amount of up to €24.2 million (“Tranche B”).
To secure the claims of the lender, land charges were created for the benefit of the lender with respect to the financed properties and further collateral was provided, in particular, by assignment of claims arising under sale and purchase agreements with respect to the collateral assets, assignment of claims under all lease agreements for the collateral assets and pledging of accounts, in particular, rent collection accounts.
Under the loan agreement, the borrowers are obligated to comply with a debt service cover ratio (“DSCR”) covenant. The DSCR shall not be less than 115%. Additionally, the borrowers have to comply with a loan-to-value covenant of an initial maximum of 75% and a maximum of 65% as of January 2, 2021. In case of non-compliance with one or more of the financial ratios, the lender is entitled to revoke the power of disposition regarding the rental accounts that was granted to the borrowers. The agreement provides for mechanisms (e.g. up to four reserve payments during the term of the agreement) to remedy any non-compliance with the agreed financial ratios.
The agreement also provides for various rights of termination in favour of the lender, in particular, in case of (i) default in payment, (ii) non-compliance with a financial ratio which is not remedied, (iii) a change of controlling interests in the borrowers, (iv) a conversion, merger, demerger or change of legal form of one of the borrowers, (v) a default in payment of at least €100,000 vis-à-vis third parties (“cross-default”) and (vi) a sale of one or more collateral assets contrary to the provisions of the loan agreement. Moreover, a material deterioration of the financial situation of the borrowers or the value of the collateral constitutes a reason for termination under the agreement.
Tranche B was fully repaid in 2015. Tranche A is due for repayment on December 31, 2021. As of March 31, 2020, €197.4 million (including interest) was outstanding. "
- The previous loan, therefore, was already x-g’teed and x-collateralised between subsidiaries of ARE and when it was upsized in 2021 may have been expanded to include subsidiaries of ADO.
Positioning:
- We remain long the Consus 22s only as we see the company with sufficient cash through the end of the year - even if it cannot sell Brack or even most of the other assets up for sale this year. By November Adler would still be looking to sell assets and so management would not be required to take action around a €120m maturity. We feel a little less confident about the ARE 2023s however.
- As regards the risk of large double-dip creditors diluting various entities, €400m is the worst case we can make out for now. There may even be nothing significant at all.
- We have previously written about the opportunity of taking Adler private. Some €500m might do to buy the free float, perhaps less, and a bid should be subject to bondholder approval of a proposal that avoids immediate melt-down (see also the last post on Aggregate). The risk associated with that would be shareholders suing for damages, but the narrow focus of the current investigation documents how little there is for shareholders to base any argument on.
- Still, over the summer, we are expecting an office raid (near term), delayed news on finding an auditor, a long period without update on sold projects and no news on Brack. We have therefore exited our position in the equity and in a next step might be more inclined to take bond risk than equity.
Please reach out to discuss,
Wolfgang
E: wfelix@sarria.co.uk
T: +44 203 744 7003