IVG AG Convertible Bond (ISIN DE000A0LNA87) – Capital Structure considerations

The IVG Convertible bond is one of my “Special Situation” investments with a weight of ~2%. The bond is far out of the money, but has a bondholder call in 2014.

The bond has performed quite well, despite IVG showing a significant loss for 2011 at the end of March.

However, today the convertible bond got “hammered” because of the following news:

IVG has another bond outstanding, a subordinated bond. Yesterday IVG announced that following the loss (which they have already released and of March), they will not pay a coupon on the subordinated bond this year.

IVG Immobilien AG has resolved to suspend remuneration on the hybrid capital issued by the company (WKN: A0JQMH). The Board of Management bases its decision firstly on the discontinuation of dividend payments to the company’s shareholders since 2008 and the resulting equal treatment of the different equity investors. Secondly, the financial resources that consequently remain in the company can be used to further improve the capital structure.

The subordinated bond has a volume of 400 mn EUR (same as the convertible) and a coupon of 8%. This means IVG is saving 32 mn EUR by not paying the bond per annum.

Of course this is bad news for subordinated bond holders which seem to have expected further coupon payments:

What convertible bond holders seem to miss here is that this is actually positive news for all senior and secured creditors including the convertible bond holders.

Each EUR retained on the coupon from the subordinated bond increases the claim for the senior creditors and thus increases the intrinsic value of the senior creditors.

So instead of decreasing in value, the senior bond should have actually increased in value. At a price of 75%, the bond would theoretically yield 18.3% for the remaining two years.

For the portfolio I will increase the psoition up to a full position with a limit of 75% .

22 comments

  • wie gesagt, alles eine Frage der recovery rate bzw. der entsprechenden Liquidationsannahmen.

  • Für den Wandler sieht das für mich entweder nach einem Debt-to-Equity Swap oder bestenfalls nach einer Laufzeitverlängerung (hinter anstehenden Refis in 2013/2014) aus. Der Hybrid hat aus Unternehmenssicht zusätzlich das Problem der kumulativen Kupons. Könnte mir vorstellen, dass sich IVG gerne auch der Rückstellung für Letztere entledigen will. Die erwähnten, vergleichsweise hohen, Umsätze vor Bekanntgabe der Nachricht lassen auf in Leck im Unternehemn schliessen. Hierum sollte sich die Aufsicht umgehend kümmern. Mir ist das für einen Rückkauf vorerst zu unübersichtlich.

    • hallo,

      einen “debt to equity swap” oder “Laufzeitverlängerung” für den Wandler wird es ohne Insolvenz der IVG sicher nicht geben.

      MMI

      • Ist es nicht eher andersherum? Ohne eine Restrukturierung ist Wahrscheinlichkeit einer Insolvenz ziemlich hoch. Die Banken sind über Grundpfandrechte besichert…

        • nein. Das ist ja auch ein “alter” Bond, d.h. e gibt hier gar keinen wirklichen juristischen Weg die Anleihe zu “restrukturieren”. Kein Bondholder wird hier freiwillig zustimmen.

          Die Zeit arbeitet hier ja auch für die Bondholder.

        • Mögliches Szenario: Die werden sich den Hauptgläubigern an einen Tisch setzen und dann wird den Bondholdern mit der Insolvenz gedroht, Erst anschliessend wird man sehen wie hoch die recovery. Ich kann nicht übersehen, was da unter dem Strich übrig bleibt, aber der Markt scheint da im Moment nicht optimistisch zu sein. Liegt wohl auch an der schlechten Presse um “The Squaire”. Man muss die Assets mal nacheinader kritisch durchgehen…

        • ja, das kann sein. Hat aber auch bei Praktiker nicht geklappt, obwohl das ja ein “neuer” Bond war ….

  • Ich hoffe Du hast nach dem Kursrutsch vor kurzem verkauft? Die rund 10 Mio Nominalkapital wussten offenbar schon vorher, dass nun Ungemach droht. Ob nun Insolvenz oder “nur” ein Kurzhaarschnitt bleibt abzuwarten….die Lage ist extrem unübersichtlich…leider hatte ich mit meinen Befürchtungen zum Thema Überschuldung wohl teilweise recht…aber vielleicht wird ja doch noch alles gut…Ich beobachte zumindest genau, ob nun Insider beim Wandler zugreifen!

  • hi JM,

    I would argue that even before this step they would have not had a chance to get unsecured or subordinated funding.

    In my opnion, this step has positive effects on teh credibility with secured creditors.

    You should also not forget that the step preserves equity capital which is important for many covenants. And saving 32 mn EUR equity capital for a company with a 300 mn EUR market cap is a lot.

    The interest on interest effect is not relevant compared to this.

    If someone is not comfortable with the risk than one should never invest
    in such an instrument. For my part I feel comfortable with the risk so I don’t have any nightmares.

    MMI

  • Since they “only” safe the interest on the interest which might be arounf 2 million/year it is a very tough and strange step which damages the reputation of IVG. 2 Mio/year is a tiny amount of money in comparison with the reputation damage. IVG will never get any unsecured loan on the market again after this step. Therefore I am still afraid that they suffer severe liquidity problems with a significant default risk. Certainly only time will tell and I prefere to sleep without nightmares. I am really curious what will be the outcome in 2 years down the road. If you get your 100% on your convertible you really deserve it and I will be not envious at all. The only good sign at the moment is that the hybrid did not collapse completely…so maybe some insiders know more and load the boat.

  • #contasco,

    a “restructuring” without explicit default is not possible. In my opinion, bank creditors will most likely have required a non-payment of the hybrid interest when they agreed on a refinancing last year.

    MMI

  • in my view, the holders of the convertible acted rationally, when they marked down the convertible when the interest deferral of the hybrid bond was announced. if ivg cannot afford the 32m p.a. to service the hybrid, then how are they going to fund the repayment of the convertible in 2 years’ time?
    you are right in the assumption that every creditor has an interest in ivg staying as a”going concern”, but i guess that only after restructuring of the unsecured debt, most likely through debt-to-equity conversion.

  • yes, understood correctly.

    Valuation: In a liquidation scenario, in my opnion IVG is not comparale to companies like Solon etc.

    The 4 bn in property assets are the “income” producing property assets. Additionally you have 1 bn “developement” assets (IVG is a developer), the “crown jewels”, the gas cavern business which is worth around 1 bn and the fund business, which has an EBIT of 25 mn is worth maybe 250 mn.

    Rent income is 220 mn EUR on 4 bn EUR real estate which is Ok.

    mmi

  • “For a recovery calculation, I would assume that equity and hybrid are subordinated and everything else is “super senior”.”

    If I am understanding correctly, you see the senior bond between equity and hybrid, and everything else?

    (Otherwise, I disagree in such way, as I’d assume that most of the bank loans are secured by land charges (Grundschulden), an any sales of property must pay out the bank loans first. The balance sheet lists 4B in prpperty assets vs 4.7B in loans “Finanzschulden”. In caseof bankrupcy the senior bonds will be technically senior to the hybrid, but I would not expect a recovery value.

    I would rather argue the senior bond is overvalued in comparison to the hybrid, but I would not like to be long on either at the moment. As you correctly point out, the downside case is zero (but for both in my opinion).

  • Can you walk through the current value through the senior notes?

  • Thanks for quick answer. But if you count on a “going concern” scenario the Hybrid could be also very interesting. Since the payments are cumulative you get a good long term yield…especially since they are already trading flat…means 8.000 Euro/bond interest already included. If I would be very confident I DEFINITELY would buy now @45…which basically means 37..due to included interest….but I am not so confident as you…mainly because of the new insolvenvy law.

    • JM, I am betting on “going concern” only for two years. I would not want to bet on a much longer timne horizon.

      Additionally, the downside case for the hybrid is zero. So for the time being I would not touch it.

      mmi

  • Basically I agree. On the other hand we have a new insolvency law here in Germany since March 2012. Therefore I am not sure whether IVG takes the same steps as Pfleiderer just did. In this case the subordinated bond will go to 0 and the convertible? I am not sure whether this bond is lower in rating than IVG’s other debts? Their debt is around 5 Billion (american counting) and their financing level above 70%! The key question is about the ranking of this convertible and what would be the left over quota in case of insolvency. With this new law I really see a big danger of a favourable insolvency for IVG in order to reduce their debt. Would be nice if you could dig out some info about the convertible ranking and some calculations in case of insolvency.

    By the way…managment bought around 40.000 shares some days ago…but in my eyes just peanuts…with strange timing. It would be a REAL sign of confidence if they would have increased SIGNIFICANTLY their holdings after the recent share drop. In a few days we will know.

    • #JM,

      thanks for the comment. I think the situation is different for IVG than for Pfleiderer.

      The new insolvency law is targeted for “normal companies”.

      In the IVG case, the banks would have to take the real estate onto their balance sheet in the case of bankruptcy. Most banks at the moment could not absorb the increased capital requirements, so a bankruptcy is not in their interest.

      This would change if Hedgefunds would be among the senior secured holders.

      My “speculation” is that they will not go bankrupt within the next 2 years.

      For a recovery calculation, I would assume that equity and hybrid are subordinated and everything els is “super senior”.

      Endo of 2011 we had
      1.4 bn Equity & Hybrid
      5.6 bn liabilites, 5.2 bn excluding the convertible.

      So the convertible is at risk if Assets are overlvalued by1.4/6.9= 20% or more.

      Howevr, as I said, I think most parties involved here have an interest in a “going concern” scenario.
      mmi

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