Adler Group: Recent Asset Sales & Recoveries

CreditSights Research
David Shnaps, CFA

EXECUTIVE SUMMARY
  • Recent announced asset sales have served to buoy unsecured bond prices. The announced sale of ~€2.5bn of assets is a positive and their successful closing will go a long way to provide investors comfort with the underlying property valuations.
  • We see a number of upcoming catalysts for the bonds. An official response to Viceroy’s claims, combined with an update on the receivables and the expected closing of the first asset sale should be a positive catalyst in our view.
  • We dig into the valuation concerns raised by Viceroy in their report. Though there is scope for subjectivity in the official valuation, in our view, there is insufficient evidence to point to the level of mis-valuation being proposed by Viceroy.
  • In order to look at downside risk given the level of uncertainty, we carry out a simplified recovery analysis using various scenarios. ADLERR bonds achieve full recovery in almost all scenarios, while in our central stress scenario excluding any asset sales, we calculate senior unsecured recovery of 91% on the ADJGR bonds.
  • Though we are more comfortable with ADLERR bonds, we maintain our Hold recommendation on both ADJGR and ADLERR. Our view on ADLERR reflects our concerns over longer-term risks, however we do see scope for a tactical investment ahead of potential positive catalysts.
RELATIVE VALUE

The uncertain outlook for Adler Group continues. However, recent events have served to buoy bond prices from the recent lows. Cevdet Caner has been more open in discussing his role in events, emerging from the shadows. More positive for the bonds in our view have been the recent asset sales both to LEG Immobilien and more recently to an Alternative Asset Manager (named by Bloomberg as KKR).

We see a number of upcoming catalysts for the bonds. The first is likely to be an official response by the company to Viceroy’s allegations. The company has taken some time already in coming up with this, but IR has informed us that ‘a detailed response will be published soon.’ This response may or may not come before 3Q21 results on 30 November. We expect the earnings release to include an update on the receivables and expected traction on forward sales in the ‘Build-to-Sell’ development portfolio, as well as the expected closing of the first of the aforementioned asset sales around the same time. There is certainly scope for this to be a positive catalyst for the bonds. Of course, if the sale is delayed, or a further delay on expected receivables, the earnings would act as a negative catalyst. The key remaining unknown is whether and when there might be a follow-up from any regulatory authorities that might be looking into the related party transactions. In the absence of any clear action, we suspect it will take a long time for the company to regain investor trust, raising longer term financing concerns for the group, beyond the immediate pressures.

Real Estate
Adler Group: Recent Asset Sales & Recoveries

David Shnaps, CFA
Sr Analyst - European Real Estate & TMT

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