Tag Archives: Praktiker Anleihe 2016

Praktiker bond – sell on bad news ?

Yesterday, Praktiker held its annual shareholder’s meeting in Hamburg. Unfortunately, I could not attend,but it seems to have been prime time entertainment for everyone who attended.

Some very lively articles about Praktiker can be found here and here.

The story is quite interesting, Austrian shareholders, representing 15% had a majority in the meeting, as less than 30% of shareholders were attending. At first, they opposed the plan of the management to first increase the share capital and then bring in US Investor Anchorage with a “super senior loan” and pledging its most valuable subsidiary, max Bahr against the loan.

As a response, management told shareholders that they will go directly into bankruptcy protection i shareholders don’t agree.

At the end, the shareholders seem to have approved the plan to bring in Anchorage after a capital increase.

Among my many posts about this interesting situation, especially my post about the possible scenarios.

In parallel, I have been doing some background checks on Anchorage and the picture does not look really good. Anchorage as a “distressed debt” specialist was among others involved in the bankruptcy of traditional German car parts manufacturer Honsel.

“Distressed debt” sounds like a very neutral word, but the business model of those “sharks” is relatively “dirty”: they come in via a loan, but they structure the loan though covenants in a way that they can call the loan pretty soon if they want.Once they are in this position, they can then force the company into bankruptcy, wipe out shareholders and senior bond holders.

At praktiker, this look like “Shooting fish in the barrel” for Anchorage: The do not only get the most valuable subsidiary pledged, but the concept includes making the subsidiary even more profitable by taking over the best Praktiker locations, leaving the “rest” for the others.

So this strategy even improves the position of Anchorage to the disadvantage of shareholders and bondholders. In My opinion, the Austrian shareholders are “feather weights” in this fight against Anchorage.

Within my scenario analysis, I would weight the “bankruptcy, zero recovery scenario” within the next few years at 50% probability. From what I have seen, the super senior loan will even expire before the senior bond

As it looks now, the market seems to interpret the result of the annual meeting positively, this opens the opportunity to sell the bonds at a small profit which I will do.

How goes the famous line: “You have to know when to hold ‘em, you have to know when to fold ‘em”….

Praktiker Bond – catalyst event (sort of…)

Interesting developement for my “special situation” investment, the 2016 Praktiker senior bond. In my analysis I had written the following:

Potential Catalyst:

In my opinion, something with regard to financing has to happen this year. So there might be a good chance that the bond reacts positively within a limited time frame if the refinancing package is hopefully finalized.

So fast forward to this weekend: The CEO and another board member have been fired and one oof the supervisory board members stepped in.

According to this Handelsblatt article, a new restructuring concept was presented by the largest shareholder which requires a lot less capital (120 mn EUR compared to 300 mn EUR) than initially announced.

There seems to be a new loan of 85 mn EUR and a capital increase in the pipeline, however no further details are available.

If one looks at the chart of the bond one can see that this was clearly positive news for the bond:

So where do we stand with regard to the initial scenario analysis ?

With this in mind, I think one can now try to analyse the different possible scenarios for bondholders, which in my opinion are

1) No bankruptcy – (unrealistic) best case: Take over within 1-2 year and early full pay out of bond
2) No bankruptcy – normal case: Bond pays out as scheduled
3) No bankruptcy – bad case: coupon gets reduced in second round of bondholders vote
4) bancruptcy – normal case: bond gets “fair” share of liquidation value 40% in 2016
5) bancruptcy – bad case: “DIP” financing reduces liquidation value significantly , value 10% in 201

I think at the moment, it is too early to fully assess the situation as the details of the financing are not available yet. Due to the bond covenants I asume the loan financing might be tricky.

So for the time being, I will hold the bond despite the quick 30%+ gain in only a few weeks. However if the bond goes above 60% without further news I will most likely sell as the intrinsic value of the negative (and cautious) scenario would have been fully realized.

Edit: On Praktiker’s homepage they issued a press release about this.

They talk of ” Vorrangiges Darlehen” which equals a senior secured loan. It will be interesting to see how they reralize this. As I have mentioned before, the bond contains a “negative pledge” covenant which should prevent any pledging of relevant assets. So this will be really interesting….

Portfolio updates – Praktiker, Nestle, SIAS, Piquadro & TUMI

Just to summarize some recent portfolio transactions:

Praktiker

In the last few days, Praktiker came back below my limit at 41%. So in toatl I bough now 641.000 nominal bonds at a “dirty price” including accrued interest of 41.62%. Clean price would be around 40.50%.

Nestle

As announced yesterday, I sold the Nestle shares at 54.47 CHF. Including 2 dividends, Nestle produced a positive performance of 24.17% for the portfolio.

I kept the CHF hedge, Vetropack is now 100% hedged.

SIAS

Also yesterday, I “pre” invested the SIAS dividend back into SIAS shares. Ex date was April 23rd, however payment date is April 26th.

Piquadro

Piquadro fell back below my buying limit of 1,50 EUR, so I will increase the position of currently 1%. Howver, tarding volume is relatively small. As always, I will sell short 50% of the purchase value with FTSE MIB ETFs.

The TUMI IPO by the way has been a great succes. The stock increased from 18 USD to 26 USD in the frist few trading days. This gives TUMI a valuation of 1.8 bn USD, which translates into P/S of 6 and EV/EBITDA of 30. Cpompared to this, Piquadro is valued at EV/EBITDA of 7 and P/S of 1.

I had hoped that the IPO of TUMI would represent some kind of “catalyst” event for Piquadro, but I think at the moment Piuqadro is overwhelmed by the Euro Crisis 2.0.

Finally, the net cash position of the portfolio after those transactions is currently 11.8%.

Quick updates: Praktiker, Total Produce and Vivendi

Praktiker

Praktiker just announced that they will delay the AGM until mid of June. The claim to be in “advanced talks” with capital providers and that they need some more time to prepare the necessary approvals from the AGM.

I am pretty sure, we will see a massive diluting capital increase exercise presented in the AGM. However, the Bond now is back into buying levels (<= 41%) and I will increase the position if possible to 2.5% of the portfolio.

Total Produce

Total produce has released its annual report. I have to dig deeper into the report at some point in time.

Vivendi

“Caque”, a French blogger has commented on yesterdays post. He has up a very very good post about Vivendi, including his personal experiences as a customer.

Also his original Vivendi post from 2011 is really worth a read. Seems to be a high quality blog to me and the only French one I know so far.

Quick updates: Praktiker, Buzzi, Aire

Praktiker

Unfortunately, theb ond already went above my limit of 41%. So I was only able to purchase a 1.4% position for the protfolio under my usual restrictions (max 25% of daily volume). I will not increase the limit for the time being.

One additional remark: I got access to the document showing all bond holders which took part in the first round of the vote. I saw no “suspicious” hedge fund participation. It will be interesting to see if they now go into a second round. According to this note of the notary, only 19% of the bondholders participated in the first round

Buzzi

After the encouraging results of Dyckerhoff, Buzzi reported total 2011 results .

The home market Italy decreased significantly, Dyckerhoff reported a total profit of ~60 mn EUR for 2011, Buzzi in total only 26 mn EUR. So net income for Buzzi ex Dyckerhoff was negative.

However, net debt has been reduced almost by the same amount as for Dyckerhoff. For 2012 they were very cautious:

Based on the above considerations, which show emerging economies well set to achieve a further progress in profitability, a stable situation in Central Europe, some opportunities for an earlier recovery in the United States and on-going difficulties in Italy, we can state that at consolidated level the next financial year should close with operating results similar to those of 2011.

It seems that the market had expected a better outlook, from my side however this is a 3-5 year “reversion to the mean” bet and we are only in year 2 now.

AIRE KgAA

For some reason, AIRE jumped significantly in the last few days.

However, I didn’t find any news and volume was relatively small. As I don’t have that many alternative “special situations”, I will keep the shares despite the price slowly approaching fair value.

Praktiker Bond (ISIN DE000A1H3JZ8) – Scenario analysis & crazy hedging idea

I already wrote a lot of posts about Praktiker in the past.

My previous summary was something like this : I don’t understand the motivation behind the recent events especially asking senior bond holders for a cut first before shareholders contribute , why they didn’t do any capital increase when the stock price was higher etc. etc.

After thinking about this the most likely possibility in my opinion is the following thesis:

Current Management doesn’t work in the interest of the current shareholders and bondholders but in the interest of potential future investors.

The result of this is relatively clear: It would be suicide to invest into the shares, as you can take a massive dilution at some point in time for granted. However, a new investor might prefer a “non-bancrupt” company, so for the bond things might look better from a risk/return perspective.

With this in mind, I think one can now try to analyse the different possible scenarios for bondholders, which in my opinion are

1) No bankruptcy – (unrealistic) best case: Take over within 1-2 year and early full pay out of bond
2) No bankruptcy – normal case: Bond pays out as scheduled
3) No bankruptcy – bad case: coupon gets reduced in second round of bondholders vote
4) bancruptcy – normal case: bond gets “fair” share of liquidation value 40% in 2016
5) bancruptcy – bad case: “DIP” financing reduces liquidation value significantly , value 10% in 201

Then we have to do 4 more steps:

First, assign probabilities to each scenario and the second, “model” cashflows.In a third steps we then can calculate “weighted” total cashflow and then calculate an internal rate of return based on current market prices.

In the following table, I have made a first try:

Bankrupt Prob. in % 2013 2014 2015 2016
Best Case No 5.00% 5.88 105.88 0.00 0.00
Normal Case No 60.00% 5.88 5.88 5.88 105.88
bad case No 10.00% 1.00 1.00 1.00 101.00
Normal Case Yes 12.50% 0.00 0.00 0.00 40.00
bad case Yes 12.50% 0.00 0.00 0.00 10.00
             
Weighted CF   100% 3.91875 8.91875 3.625 79.875

This scenario would give the bond at the current price of 40% an implicit IRR of 28%, which would be attractive. If we would change for instance the “normal non bancruptcy” probability to 35% and increase the two bancrupty scenarios to 25% each, we would end upwith a 17.6% IRR.

Bankrupt Prob. in % 2013 2014 2015 2016
Best Case No 5.00% 5.88 105.88 0.00 0.00
Normal Case No 35.00% 5.88 5.88 5.88 105.88
bad case No 10.00% 1.00 1.00 1.00 101.00
Normal Case Yes 25.00% 0.00 0.00 0.00 40.00
bad case Yes 25.00% 0.00 0.00 0.00 10.00
             
Weighted CF   100% 2.45 7.45 2.16 59.66

An analysis like this can help to understand better the sensitivities of such a rather complicated special situation investment.

Of coure, the probability of bankruptcy is the single most important driver, so let’s discuss this shortly:

On the positive side we have the fact that Praktiker survived the year end and the restocking of inventory for the spring 2012 season. Further, I think at the moment no one has a real advantage if Praktiker goes bankrupt. The biggest problem, the leases for the real estate, could be better reduced if Praktiker would be bancrupt but on the other hand they might have much more problems getting merchandise delivered even if bankruptcy would only be short term.

Additionally, I think the “year end accounting blood bath” makes more sense on a going concern basis than if one would prepare a “prepackaged” bancruptcy.

Potential Catalyst:

In my opinion, something with regard to financing has to happen this year. So there might be a good chance that the bond reacts positively within a limited time frame if the refinancing package is hopefully finalized.

Stand alone risk / return and portfolio view

If I compare Praktiker with the sucessful WestLB Genußschein investment, the Praktiker bond looks more risky, both from the potential downside and time horizon. However, also the potential upside is a lot higher at current levels.

However, on a portfolio level, things look differently. With special situations, I try to make “bets” as long as they are company specific and not directly correlate with each other or “normal” portfolio companies.

With Praktiker, we have the interesting situation that the bond ecoonomically is even negatively correlated with one of my core holdings, Hornbach.

This is something we can clearly see in current company news. In 2011, the German DIY segment showed around 3% growth, Praktiker lost almost 10% in slaes whereas Hornbach and OBI gained significantly above the market growth with 5-6% growth each.

If Praktiker really goes bancrupt, Hornbach among other will profit even more, either through taking over some of the better locations or just gaining more customers. On the other hand, if Praktiker manages the turn around or even gets a startegic shareholder, they might win back a lot of customers from the competition and hurt them significantly.

So one could argue (and I know this sounds a little crazy) that the Praktiker bond combined with the Hornbach shares creates a kind of “hedged” position.

Just for fun I loked at correlations between the Praktiker share, the Praktiker bond and the Hornbach Baumarkt Aktie. And, surprisingly we see the following based on 12 months and daily observations:

Over the last 12 months, the Praktiker share was slightly positively correlated with the Hornbach share (+0.03) whereas the bond was slightly negatively correlated with -.002. Not much but. nevertheless interesting. Again, for instance the last 4 months shows a small positive correlation between the shares (0.05) and a slightly negative correlation (-0.02) between Bond and Hornbach. So maybe not that crazy after all….

Summary:

On a stand alone basis, at current level, the Praktiker Bond is no “sure thing”, but a relatively risky speculation however with a relatively attractive risk/return ratio. In combination with the Hornbach share in my opinion, the combined position has a very intersting risk/return relationship which can greatly increase the expected return of the portfolio by actually reducing risk on an overall level.

I will therefore add a half position (2.5%) of Praktiker 2016 bonds to the portfolio at current prices (limit 41% of nominal value).

Praktiker update – Loss 2011 and result of first vote of “voluntary bond haircut”

Praktiker, the troubled DIY chain has issued a preliminary earnings release yesterday evening.

They managed to book a total loss of 554.7 mn EUR, which translates into -9.56 EUR per share. So most of the 2010 book value of around 14 EUR has now dissapeared within a year.

Very strange (at least for me) was the following passsage:

– So führte die erstmalige Anwendung einer neuen Bewertungssystematik für Warenvorräte zu einer Wertberichtigung des Vorratsvermögens (69,8 Millionen Euro).

So inventory was written down by 70 mn EUR due to a new “method”. This is almost -10% of the 800 mn inventory they showed in Q3 2011. I would be really curious what kind of “method” they used before.

Voluntary Bond haircut

For some reason, I only found the results of the first bondholder praktiker 27.03.2012“>vote through the Luxemburg exchange and not through Praktikers homepage.

So within the process described in a previous post, less than the required 50% have voted in the first round.

However, in the second round only 25% of the bondholders have to vote. So let’s wait and see if those 25% are already “in the bag” and if in the second round more bondholders participate.

It would be really interesting to know, who voted in the first round but as a non-participant I don’t have access too this file on Praktiker’s homepage.

Praktiker AG bond – doing the homework on German law and further thoughts

“Homework”

My last post about Praktiker contained some mistakes especially about he required votes for any change in the provisions of the bonds. I have to admit that I didn’t read the paragraphs before. So let’s do the homework and look at the “Schuldverschreibungsgesetz – SchVG“.

One of the mistakes I made was the following:

Technically, they need at last the mojority of 50% of the bondholders in the first round. If this doesn’t work, in the second round, the majority of a minimum 25% of bondholders (effectively 12.5% plus one bond) could then agree to the changes on behalf of all bond holders.

The German law says however:

Beschlüsse, durch welche der wesentliche Inhalt der Anleihebedingungen geändert wird, insbesondere in den Fällen des Absatzes 3 Nummer 1 bis 9, bedürfen zu ihrer Wirksamkeit einer Mehrheit von mindestens 75 Prozent der teilnehmenden Stimmrechte (qualifizierte Mehrheit). Die Anleihebedingungen können für einzelne oder alle Maßnahmen eine höhere Mehrheit vorschreiben.

So this means the following: In order for the requested changes to become effective, 50% of the Bondholders have to participate in the first round and 75% of the particpants have to approve the proposal.

The same applies to a second round, if 50% particpation is not reached in the first instance, again, 75% of the partcipants have to agree to the proposal. So in an absolute worst case 18.75% of the bondholder could make the requested “hair cut” effective.

Further thoughts:

I still struggle making sense of the sequence of the events. However I came up with one (maybe unlikely) scenario:

I think no one is really interested in putting money into Praktiker as a “minority” investor. However, due to the CoC “poison pill”, a purchase of a majority would be very expensive. So in theory, a prospective buyer wants to buy as many bonds as at a discount as possible in ordert to lower his total purchase price.

The “offer” of cutting the coupon could therefore be a “tool” to get as many bonds at a discount to make a majority acquisition (i.e. through a highly dilutive capital increase) without paying out 250 mn EUR to the bondholders. For someone potentially owning both, a majority position in the shares and a large block of bonds, the cut in the coupon could be value enhancing.

It doesn’t change my approach (Don’t invest if you don’t know the motives of the players involved), but it makes good entertainment and hopefully a good learning experience.

Praktiker Anleiheprospekt – “Poison Pill” gegen potentielle Übernehmer

Nachdem die Anleihe fröhlich weiter abschmiert, lohnt sich vielleicht ein Blick in den Anleiheprospekt. Den findet man z.B. hier im Wertpapierformum.

Der interessanteste Teil des Anleiheprospektes ist m.E. der § 5 Absatz (2) Kontrollwechsel. Das ganze ist recht komplex aber wenn ich es richtig verstehe, dann würde die Anleihe bei einer Übernahme sofort fällig werden.

Das Problem ist, dass die Anleihe ja kein Rating hat und das wird im Bondprospekt bei Übernahme Fall einem Absenken des Ratings auf Non-Investmentgrade gleichgestellt:

(ii) wenn zum Zeitpunkt des Kontrollwechsels kein Investment Grade Rating für die Schuldverschreibungen oder die Emittentin vergeben ist und keine Rating Agentur innerhalb des Kontrollwechselzeitraums ein Investment Grade Rating für die Schuldverschreibungen vergibt

Im Klartext heisst das: will jemand die Praktiker AG übernehmen, dann muss er innerhalb kurzer Zeit ein Investmentgrade Rating besorgen oder es werden sofort 250 Mio. EUR zur Rückzahlung fällig.

Im Fachjargon nennt man so etwas auch eine “Poison Pill”. Eine Hornbach AG z.B. hat selber nur ein Non-Investment Grade Rating (BB+, was für ein Witz) und müsste dann zusätzlich zum Kaufpreis noch 250 Mio Cash für die Rückzahlung der Anleihe auftreiben.

Fazit: Durch die Klausel in der Anleihe dürfte jegliches Interesse Praktiker zu übernehmen auf 0 sinken. D.h. Praktiker muss da selber durch. Wer auf eine Übernahme hofft, dürfte lange warten