Legal Analysis: Adler Proposed Amendments Would Allow €937.5M of New Debt, Offer for Noteholders to Invest at 12.5%, 2.75% Increase in Notes’ Interest Rate, Tighter Covenants; Noteholders to Be Substantially Subordinated; 34% of 2029s to Refuse; Adler to Pursue Changes Using Alternatives

Relevant Documents:
OM for Adler Group €400M 1.5% 2024s
OM for Adler Group €400M 3.25% 2025s
OM for Adler Group €400M 2.75% 2026s
OM for Adler Group €700M 1.875% 2026s and €800M 2.25% 2029s
Pricing Supplement for Adler Group €500M 2.25% 2027s & Base Prospectus
OM for Adler Group €500M EMTN Program
OM for Adler Real Estate’s €500M 1.875% 2023s and €300M 3% 2026s
OM for Adler Real Estate €300M 2.125% 2024s
Consent Solicitation
Adler Group Q3 Earnings Call
Release (Dec. 9, 2022)
Release (Dec. 8, 2022)
Cleansing Presentation
Q3’22 Adler Group Presentation
H1’22 Adler Group Presentation
Q2’22 Adler Group Report

German real estate company Adler Group asked holders of €3.2 billion of its unsecured non-convertible notes on Dec. 2, 2022 to consent to the incurrence of €937.5 million of new senior secured debt (Stabilization Priority Indebtedness) which matures on June 30, 2025 (proceeds to be €880 million net of fees). The new money, which will subordinate Adler Group’s unsecured non-convertible notes, will help repay debt maturing in 2023 and 2024, mainly €800 million of Adler Real Estate’s (Adler RE) notes.

Noteholders have been invited to be lenders under the Stabilization Priority Indebtedness. We assume this is on a pro rata basis and contingent on them agreeing to the consent solicitation.

Adler Group has stated that under a lockup agreement signed with a steering committee of noteholders as part of its debt restructuring, more than 60% of the noteholders had acceded to the agreement and three of the six series of unsecured notes have passed the 75% voting threshold under each series of notes required to pass the amendments in the consent solicitation. If the amendments are passed, they will be binding on all noteholders.

However, a group representing more than 34% of the unsecured notes due 2029 (2029s) (some of which have cross-holdings in the group) has mandated Akin Gump and Gleiss Lutz to advise it in the restructuring, as reported. It intends to vote against the amendments and, because all six series of Adler Group’s unsecured notes would need to incorporate the amendments, this would mean the amendments would not be passed. The 2029 group has stated that the amendments unfairly favor the 2024s and ignore the legal status of the 2029s and other unsecured notes, and seeks to discuss alternatives with Adler Group and other noteholders.

Voting begins on Dec. 17 and ends on Dec. 19, with results expected on Dec. 22.

If the consent solicitation is not successful, Adler Group has stated it will implement the amendments using an in-court process, such as a U.K. Part 26A restructuring plan, company voluntary arrangement, or German StaRUG process. If one of these methods is used to implement the amendments, noteholders who had signed the lockup agreement by Dec. 13 will receive a 25 bps transaction fee.

The amendments are expected to become effective in the first quarter of 2023 (Transaction Effective Date), following completion of the IDW S6 opinion required by the Stabilization Priority Indebtedness lenders (we describe this new money creditor-protective opinion HERE).

S&P has changed Adler Group and Adler RE’s long-term issuer credit rating and their notes’ issue rating as follows:
 

• Adler Group: from “CC” to “CCC” (issuer and unsecured notes rating); and

• Adler RE: from “CCC” to “CCC-” (issuer rating) and “CCC-” to “CCC” (senior unsecured debt rating).

S&P has also stated that the debt restructuring will lead it to lower Adler Group SA’s rating to “selective default” and its debt ratings on several instruments to “D”.

Adler Group’s 2024s are trading at 68.8, with the rest of the notes trading around 35-41. Adler RE’s 2023s and 2024s are trading at 92.9 and 87.8, respectively, with the 2026s trading at 69.4 as of Dec. 12, 2022, according to Cbonds:

This article is intended to help Adler Group unsecured noteholders assess the risks when considering whether to agree to the consent solicitation. It also highlights some of the key considerations when examining the alternative implementation routes.

For Reorg’s coverage of: Adler Group see HERE; Adler RE see HERE, and Consus Real Estate AG (Consus) see HERE.
 
Below is a summary of the background to the consent solicitation and the key considerations for noteholders. For the more detailed analysis of the summarized issues and key considerations, see HERE.
 
Security and Creditors’ Lien Priority

Shares, intercompany receivables, claims under loans to minority shareholders, and land and buildings of Adler Group subsidiaries, including those of Adler RE and Consus, will be pledged to secure debt in the following order of priority:
 

• The Stabilization Priority Indebtedness on a first lien basis (after fees);
• The 2024s, €24.5 million of loan notes and €165 million (€102 million after netting of €63 million held by Adler RE) of convertible notes due Nov. 29, 2023 on a second lien basis (it is very unusual to see convertible notes rank above senior notes); and
• Adler Group’s five other series of unsecured notes amounting to €2.8 billion in aggregate on a third lien basis.

However, first ranking pledges already exist over certain subsidiaries’ shares in favor of other creditors, so these will rank ahead of all the debt above. The extent of these pledges is not described and may be extensive.

25 bps Consent Fee

If the amendments are passed, all consenting noteholders will receive a 25 bps consent fee.

Planned Debt Repayments in 2023, 2024 and Payments Required in 2025

According to the cleansing presentation:
 

• The group plans to on-lend €535 million of the Stabilization Priority Indebtedness to Adler RE, and repay a €265 million intercompany loan it has with Adler RE that matures on Dec. 29, 2022, with Adler RE receiving a total of €800 million in aggregate from Adler Group that will cover repayment of its 2023s and 2024s.

• Adler Group’s projections through to Dec. 31, 2024, assume total debt repayments of €1.034 billion. This comprises €194 million of Adler Group debt, €840 million of Adler RE debt, and refinancings of €564 million of secured debt and €190 million of unsecured debt. We assume the Adler Group debt to be repaid includes a €21 million Consus loan that matured on Oct. 1 this year and €120 million in Consus convertible bonds that matured on Nov. 29, and will be partly funded by €80 million of Stabilization Priority Indebtedness. We assume the remaining €53 million of the Adler Group debt will be used to repay loans, but this is not disclosed. The Adler RE debt to be repaid will be the 2023s and 2024s and, we assume, €40 million of bank debt, but this is not disclosed.

Under the lockup agreement, Adler Group has agreed to use its reasonable best endeavors to extend a standstill of its €390 million facility and arrange a waiver or standstill on its Commerzbank €100 million facility. The original or proposed extended maturity date for these loans has not been reported but we presume them to be the group’s LBBW loan maturing on June 30, 2025 and the Commerzbank banks loan maturing Mar. 31, 2028.

According to the Q3’22 Adler Group presentation, cleansing presentation and recent management Q3’22 call, Adler RE’s €300 million of notes due 2026 will remain outstanding and Adler Group’s €102 million convertible notes due Nov. 23, 2023, are to be refinanced, with its remaining notes to remain outstanding. The 2024s’ maturity date is to be extended by one year to July 31, 2025 as part of the consent solicitation amendments.
 
Adler Group noteholders are being asked to amend the covenants in their notes so the Stabilization Priority Indebtedness can be incurred to repay debt maturing in 2023 and 2024 and to make other amendments. In return, noteholders are being offered:
 

• A 25 bps consent fee;
• A 2.75% increase in the interest rate under their notes until July 2025 (when the new debt becomes repayable);
• The opportunity to be lenders of the new secured debt. We assume this is pro rata and conditional upon them agreeing to the amendments. The debt has an interest rate of 12.5%, which is significantly higher than that under the notes; and
• A more pro-noteholder covenant package, including a restriction on payments to shareholders (not in the current notes), a debt basket of €150 million (currently limited by ratio tests), and a 87.5% loan-to-value financial covenant beginning Dec. 31, 2024.

In deciding whether to agree, noteholders will need to weigh-up the above against:
 

• Being subordinated to not only the Stabilization Priority Indebtedness but also €165 million of convertible notes and (except the €400 million notes due 2024) Adler Group’s 2024s;
• Losing out on the consent or lockup transaction fee and being senior secured lenders when Adler Group might be able to push through these amendments without their consent anyway through an alternative implementation plan;
• A delay in interest payments until July 31, 2025;
• Whether they will be able to get a better deal in an alternative implementation plan; and
• The effect on the price of their notes in the market if they are subordinated to so much debt.

We describe the consent solicitation amendments and risks in more detail below.
 
€1.527B Debt Will Prime Remaining Notes

Shares, intercompany receivables, claims under loans to minority shareholders and land and buildings of Adler Group subsidiaries, including those of Adler RE and Consus, will be pledged to secure debt as described in the Security And Creditors’ Lien Priority section above. Non-2024 noteholders will be subordinated to at least €1.527 billion of Priority Indebtedness, including the 2024s and €165 million of convertible notes.

Interest

The interest rate for all notes will increase by 2.75% from the Transaction Effective Date until July 31, 2025, when they will revert to their original levels. Notes other than the 2024s will not receive a higher increase even though they are riskier in being subordinated to the 2024s as regards security enforcement proceeds.

Cash interest will only be paid on July 31, 2025, and annually thereafter, as originally agreed.

Interest accumulating until the Transaction Effective Date will not be capitalized.

Release Of Security to Secure €100M Consus Debt

The security can be released to secure up to €100 million of Consus debt (Consus Collateral).

2024s Vote Alongside Lower Ranking Notes in Enforcement

Enforcement instructions are given by a simple majority of noteholders but this will include the 2024s that rank higher than the other notes and their interests may conflict.

However, the 2024s votes will only be a maximum of 12.5% of the vote (€400 million of a total €3.2 billion) or 16.4% (if the 2024s are increased by the €150 million additional debt and security baskets).

2024s Maturity Extended by One Year

The maturity of the 2024s is to be extended by one year to July 31, 2025.

€1.637B Debt to Address in 2025

If the amendments are passed, Adler Group will have at least €1.637 billion of debt to address in 2025. This will include €800 million of notes that mature half way through 2025 and €937.5 million of Stabilization Priority Indebtedness, assuming the €101 million of gross disposal proceeds expected by FY’24 end is used to repay Stabilization Priority Indebtedness, even though most of the disposals are at the Consus and Adler RE level.

PIK interest of €431 million as calculated by Reorg (assuming transaction effective date of Dec. 31, 2022, and excluding pre-transaction cash interest) is also payable on the notes on July 31, 2025.

The 2025 maturities could be partly addressed with Adler Group’s expected unrestricted cash position of €166 million at the end of FY24.

Unless the real estate market improves significantly over the next two years, the above makes a refinancing for debt maturing 2025 onwards likely.

Payments to Shareholders Not Permitted

Payments to shareholders will be prohibited. This prohibition is not in the current notes. The drafting could be tighter in stating this includes indirect shareholders in case a parent entity is inserted between Adler Group and its current owners.

There is a carve out for a “payment on or repayment of any loans made to minority shareholders”. The drafting should be clarified to establish whether this should be “made by minority shareholders” (German text prevails). Otherwise, the carve out appears to allow uncapped loans to minority shareholders, though such a loan is not usually described as a “payment on … any loan”.

Indirect Asset Sale Covenant

There is no asset sales covenant for the notes but under the intercreditor principles non-distressed disposals proceeds must be applied in accordance with the terms of the Stabilization Priority Indebtedness (terms not disclosed). We assume the terms require sale proceeds be used to prepay the Stabilization Priority Indebtedness.

Negative Pledge Tightened But Carve-Outs Remain

The negative pledge will be tightened to the benefit of the noteholders so that if any debt (not just capital markets debt) is incurred by a subsidiary, and not only a subsidiary representing 3% or more of total assets, then the notes must be equally secured. This is subject to a carve out of:
 

• €150 million of debt, less the amount of debt secured by Consus Collateral (in the current notes there is a carve out for €200 million of any capital markets debt); and
• Security over the assets of Brack Capital Properties N.V. and its subsidiaries (63% owned by Adler RE) to secure its debt (this is not in the current notes).

Additional Debt Limited to €150M

Debt incurrence will no longer be subject to ratio tests but only €150 million of additional debt can be incurred. This debt could prime the notes by being secured with the negative pledge carve-out of €150 million or incurred by a non-guarantor subsidiary (see below).

Risk of Maturity, Structural Subordination of Noteholders

Refinancing debt is not required to have a maturity date that is the same date or later than the maturity date of the debt being refinanced, as would be standard. Adler Group can agree with any noteholders that their notes mature earlier than another series of notes in the structure. Noteholders may find they become maturity-subordinated to notes that were due to mature later than their own and could lose their potential refinancing advantage by being higher up the refinancing queue.

The standard requirement that any debt of a guarantor cannot be refinanced with debt of a non-guarantor is also missing, i.e. a requirement that refinancing debt cannot be structurally senior to the refinanced debt or the notes. Noteholders may find themselves structurally subordinated to previously pari passu unsecured senior debt of the Adler Group or a guarantor. Guarantor coverage as a percentage of total assets or EBITDA is not described. Any notes refinanced with non-guarantor debt would lose their third-ranking claim to the security, although they would gain a prior claim to the assets of the non-guarantor before anything remaining could be claimed by the noteholders.

New Quarterly 87.5% LTV Ratio Test (85% After Dec. 31, 2025) Is Not Tested Until Dec. 31, 2024

Adler Group will need to comply with a quarterly 87.5% LTV ratio test (85% after Dec. 31, 2025) but the test is also delayed until Dec. 31, 2024. As of Sept. 30, 2022, Adler Group’s covenant loan-to-value ratio was 55%. If the Stabilization Priority Indebtedness is added to this, the ratio is estimated at 56% (€6.027 billion consolidated net financial indebtedness plus €937.5 million new money, less €880 million of repaid debt using new money, divided by €10.956 billion total assets).

2022 Audited Financial Statements Not Required to Be Published Until Dec. 31, 2023

The amendments allow Adler Group until Dec. 31, 2023, to deliver audited financial statements for 2022, provided it has published unaudited accounts by Apr. 1, 2023.

Payments on CVRI Uncapped

Adler Group is issuing a contingent value rights instrument, or CVRI, as part of the consideration for the Stabilization Priority Indebtedness. It allows the relevant lenders to subscribe for 25% of the equity value of Adler Group at a zero strike price. If Adler Group’s shares relating to the CVRI are not delivered within six years after utilization of the Stabilization Priority Indebtedness, the equity instrument will be settled in cash. Payments are allowed on the CVRI without a cap but this may be due to the nature of the instrument. Investors should check whether the cash settlement is the only payment allowed on the instrument and ensure that it can only be paid after the 2029s have been repaid.

Unclear Drafting of Uncapped Basket for Payments Relating to Minority Shareholder Loans

The drafting of the basket for a “payment on or repayment of any loans made to minority shareholders” should be clarified. It is unclear whether this should be “made by minority shareholders” (German text prevails). Otherwise the basket appears to allow uncapped loans to minority shareholders, but such loans are not usually described as “payment[s] on … any loan”.

It is not clear that the pro rata requirement (presumably pro rata with a connected payment to the majority owned Adler Group subsidiary) applies to such loans. We presume is does not and that it applies only to distributions.

Stabilization Priority Indebtedness Cross-Default Is Not Included in Defaults That Allow 15% of Noteholders to Accelerate

Clause 10(4) (Quorum) needs to be amended to allow 15% of noteholders to accelerate as a result of a Stabilization Priority Indebtedness cross-event of default.
 
Timing

Timing will be a key factor in deciding which implementation method is used, should the consent solicitation be unsuccessful. Any in-court process will take longer given the procedural steps which must be followed (for example a Part 26A plan will include two court hearings, a convening hearing and a sanctioning hearing). That being said, a Part 26A plan can be concluded and approved by the court in eight weeks, provided it is uncontested.

A German StaRug process would probably take roughly the same amount of time provided there are no disagreements. Any challenges to the process will obviously lengthen the timetable. This is important given the group has maturities which it will need to address in 2023, the first one being in April 2023. For example, the company will not be able to repay the €500 million senior unsecured 2023 notes without the new money, which is being provided under the proposed transaction.

Certainty of Process

Another factor in selecting the implementation method in a Plan B scenario will be certainty of process and creditor confidence. The new German scheme, StaRUG, has many advantages including having an cross-class cramdown mechanism (akin to the Part 26A restructuring plan) and, more importantly, would not require the group to take any steps for a German court to have jurisdiction.

However, the StaRUG is a new process that has only been in place since January 2021. This means that it is largely untested and doesn’t benefit from a body of case law which could inform creditor decisions as to potential risks and outcomes. Comparatively, while the U.K. restructuring plan is also relatively new, there have been a number of cases since its inception. Restructuring plans also have the benefit of precedents in relation to schemes. Similarly, English law judges are well versed in dealing with complex restructurings. Each of these elements would increase creditor confidence in using the Part 26A restructuring plan.

Jurisdiction

The group will need to consider if any “other additional steps” will be required in order for it to follow a particular implementation route, which could also have an impact on timing and cost.

A StaRUG process would require no further steps to be taken in order for a German court to have jurisdiction. In order to implement the transaction using a Part 26A restructuring plan, the group may have to incorporate an English law co-obligor for the notes or amend the governing law of the notes to English law, for the courts to have jurisdiction.

Costs

Similar to timing, any in-court process will be more expensive than a consensual deal. Such costs will increase, the longer the process takes and the more complex the transaction, for example if a Part 26A restructuring plan is contested.

Capital Structure

A capital structure of Adler Group is below: