value and opportunity

IVG is an interesting example for a “distressed” company, where the position as Senior bondholder is much more comfortable than being a shareholder.

After announcing relatively good Q3 numbers on which I commented earlier this month, they announced today the following:

The management board of IVG Immobilien AG, Bonn (ISIN DE0006205701) has, with the consent of the supervisory board, resolved to increase the registered share capital of the company from € 138,599,999 by € 69,283,885 by issuing 69,283,885 new ordinary bearer shares.

The new shares will be offered to existing shareholders by means of indirect subscription rights at a subscription ratio of 2:1, meaning that two existing shares will entitle a shareholder to subscribe for one new share. The subscription price is € 2.10.

A lot of people bought IVG shares because they trade well below book value, howver, issuing such a huge amount of new shares at an ever larger discount to book value is a clear dilution for existing shareholders. The result was a 15% drop in the shareprice.

For the 2014/2017 Convertible bond, this is in contrast good news which shows in a steadily increasing bond price:

From my point of view, there are a few take aways from this situation:

– looking at price to book ratios for distressed companies should always include the possibility of massive dilution
– especially when banks are involved who can use loan covenants as a tool the force capital increases, shareholders will normally suffer
– in such cases buying senior bonds at a large discount looks like a much better position compared to stocks
– stock or subordinated debt of distressed companies will only become intersting, once liabilites are reorganized in a way that no refunding is necessary for an extended amount of time (e.g. through long term bond issuance)

In my opnion, we will see more or less similar actions for Praktiker.