Monthly Archives: March 2012

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

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“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.

Commerzbank HT1 tender offer – results

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Commerzbank just released the results for their tender offer.

Interestingly, all tendered securities have been accepted, so the described arbitrage strategy has worked out nicely for anyone able to exploit it.

What I found extremely interesting is the fact, that less than 15% of the UT2 were tendered but almost 60% of the HT1 bonds (584 mn out of 1 bn).

One of the reasons could be that the HT1 bond was owned by hedge funds anyway who had hedged the bonds at least partly with shares even before the tender.

For a small HT1 investor with a medium term time horizon, the outcome is actually positive. In my opnion, the reduced amount of outstanding bonds will increase the chance that Commerzbank will actually call the bonds in 2017, when they switch into floating rate and loose all benefits with regard to capital ratios.

Based on 68%, the potential yield if they are called at par in 2017 would be still 17.2% p.a. which I find is extremely attractive.

Praktiker AG Bond – Greek haircut anyone ?

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In December, I had speculated at what level the Praktiker bond could be interesting. At that time, the bond traded at 38%. During the 2012 rally, the bond almost doubled close to 70% before drifting lower to around 58% in the beginning of the week.

However yesterday Praktiker announced that they will ask the bondholders to accept a “voluntarily” a cut in the coupon from currently 5.875% to 1% in order to “participate fairly” in the burdens for a restructuring.

The bond didn’t trade today, but some broker quotes (without volume) showed prices 34/40 bid/ask.

The German press release says, that potential new investors want to see sacrifices form bondholders and that they are “investigating” a capital increase.

What I don’t understand is the sequence of actions. Those who gain the most from the restructuring have to “sacrifice” first. So the first step would be a capital increase and then asking the bond holders and other creditors. With the current sequeunce of events, Praktiker will most likely never issue a unsecured bond again after this.

As I said in the last post, there is no reason why bondholders should accept anything less than the conditions in the prospectus.

Of course this should be clear to the Management. So is this just a “token” announcement to fullfil some formal requirements or is something else going on ? I do not know.

Technically, they need at last the mojority of 50% of the bondholders in the first round. If this doesn’t work, in the second rounfd, 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.

I tried hard to construct any “game theory” situation where this announcement makes any sense. The only one I came up was that management wants to improve the position of the new investors via the bondholders and that they don’t plan to go back to the bond markets for a long time. Addiitonally they have to be sure that a large block of bondholders is voting in their favour for whatever reason.

In any case, as I don’t really understand what is going on, I wil not be tempted to invest anyway, no matter what the price is. The old saying goes “If you don’t know who is going to be the looser, it is most likely yourself”. So for the time being, the senior bond doesn’t look like a winner.

But ut is still a very interesting learning experience for potential distressed debt investments.

Portfolio Performance February 2012 & comments

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Performance:

In February 2012, the portfolio performed suprisingly strong with a monthly performance of +6.7% against +5.1% of the benchmark.

Why is this a surprise ? As written before, I try to construct the portfolio in a way that I expect to get around 2/3 of any upside moves, but (hopefully) limiting the downside to max 50% of the benchmark. So a performance like February, with an outperformance in a still strongly rising market is definitely an exception.

The major reason for this outperformance were mainly the two “catalyst” events, the 210 EUR offer for Draeger Genußscheine and the buy back offer of Commerzbank for the HT1.

YTD the portfolio is up +10.4% against +13.9% in the benchmark. With a 75% participation rate of the upside move, this is still above my expectations and should be viewed as not typical.

Since inception (01.01.2011), the portfolio is now up +5.9% against -1.9% of the benchmark.

Current Portfolio:

Name Weight
Hornbach Baumarkt 5.1%
Fortum OYJ 5.2%
AS Creation Tapeten 4.0%
BUZZI UNICEM SPA-RSP 5.4%
Autostrada Milano Torino 4.9%
EVN 3.1%
Walmart 3.9%
WMF VZ 3.9%
Tonnellerie Frere Paris 4.0%
Vetropack 4.8%
Total Produce 5.2%
OMV AG 2.1%
Nestle 2.2%
Piquadro 1.1%
   
Drägerwerk Genüsse D 8.6%
IVG Wandler 2.3%
WESTLB 6.9% 5.6%
DEPFA LT2 2015 3.4%
AIRE 5.1%
HT1 Funding 5.1%
EMAK SPA 6.1%
DJE Real Estate 4.4%
   
   
Short: Kabel Deutschland -2.1%
Short: Green Mountain -2.2%
0 0.0%
Short Ishares FTSE MIB -1.0%
Terminverkauf CHF EUR 0.2%
   
Tagesgeldkonto 2% 9.7%
   
Summe 100.0%
   
Value 54.8%
Opportunity 40.6%
Short -5.1%
Tagesgeld 9.7%

As posted over the month, there had been quite some changes in the portfolio.

Completely sold /exit

– Frosta AG (limited upside due to increasing costs and limited power to raise prices)
– Westag (same as Frosta)
– Sto Vz (fairly valued at current prices)
– Magyar telecom (assumption in investment thesis did not play out, fairly valued)
– KSB Vz (fairly valued at current prices, BRIC exposure)
– Draeger Short (tactical move, price of Genußschein “floored” at current offer price)

Increased:
– DJE Real Estate (continued buying to reach fuel position size)
– Tonnelerie (increase to full position, potential “catalyst” with Radoux deal)
– Vetropack (increased to full position as “long term compounder”.
– Autostrada (increased due to catalyst event to full position)

The total number of positions is now 24, which is a managable number of stocks. The split between “value stocks” and “special situations” is now 55% / 40%, cash is at the target level of 10%.

On the buy list are currently Tonnelerie and DJE until 5% are reached, as well as Piquadro under EUR 1,50 per share. For Piquadro, I will enter into a half position max.

Potential sells are mainly the large caps (Walmart and Nestle). If I sell Nestle, I will need to close the GMCR short as well as this was set up as a pair trade.

Outlook:

All in all, I still expect a “sideways market” over the next view years and the protfolio will be positioned accordingly as described above. Short term tail risks especially for Europe seem to have diminished somehow through the ECB intervention. The outcome of the Greek PSI is in my opnion not very relevant on a macro perspective. Even a further decline for Portugal seems to be priced into the market already.

The one spot I am most concerned at a macro level is the situation in China. We clearly see a clear slow down in construction activity. Despite the rhetoric of China seamlessly moving to a stable, consumer oriented society through the wise hands of the communist party, this would be the first time in history that such an epic construction boom would not end in a prlongued recession or depression. “This time its differnet” is a concept which doesn’t work against common sense and historical evidence.

If China would actually go into a severe recession, especially the now successful large international companies would be hit, which currently show record margins despite the “western world” being more or less in depression.

The general argument in the moment runs like this: Large International stocks are “cheap” and they are more secure because they are less effected by the “European crisis”.

Volkswagen is a good example. Based on recently announced earnings for 2011, they trade at a trailing P/E of 4. Howver, the net Income margin of 2011 at 9.67% is around 3-4 times above the avaerage of the last 12 years at around 2.8%. So one could ask now: Has Volkswagen revolutionized the car business and gained a significant competitive advantage or are they just reaping the “fruits” of the current China boom. As I cannot identify any significant competitive advantage for Volkswagen, I assume that at some point in the not so far future, margins will “normalise”. Under this assumption, Volkswagen is currently farily valued. Not overvalued, but also without real potential. As we have seen in 2008 and 2009, the situation for car campanies can virtually change over night.

So for the protfolio, I am actually looking for increasing the share what I call “special situations” in order to protect the downside. Although the “lure” of “cheap” large caps will stay.

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