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% .