value and opportunity

As many may know, German drug store retailer Schlecker went bankrupt a few weeks ago. Schlecker was not listed and didn’t have any bonds outstanding, but I found nevertheless this article quite interesting:

Hamburg – Angemeldeten Forderungen von 665 Millionen Euro gegenüber Schlecker stehe ein möglicher Ausschüttungsbetrag von höchstens 27 Millionen Euro gegenüber, berichtet der “Spiegel” am Sonntag. Ein Sprecher von Insolvenzverwalter Arndt Geiwitz wollte sich am Sonntag zum Ergebnis des Insolvenzverfahrens nicht äußern.

In “plain English” this means that the recovery rate seems to be around 4%. Other Gerrman cases in the newer history (Solon ect.) show similar low single digit recovery rates given default.

So this is something to keep in mind: If Praktiker goes bankrupt, the downside will not be protected much, especially if Max bahr is succesfully pledged to the PE investor. The longer the process to bankruptcy takes, the less is remaining for senior creditors, this is for sure.

Another interesting aspect is the fact that Schlecker, similar to Praktiker had a “premium brand”, the “Ihr Platz” chain of drug stores which they acquired in late 2007. According to this article, a seperate sale of this failed es well.

I am not sure how this compares directly to Max Bahr and Praktiker, but it shows that it might not be so easy to just separate one Retail brand within a larger retailer group and sell it to someone else.

For the Praktiker Senior Bond this means that the “0% downside scenario” should be weighted higher the longer the current process takes.

I am not sure if Anchorage has already invested, but based on the Schlecker example, Anchorage would have a clear incentive to speed up the insolvency of Praktiker in order to get full control of Max Bahr. The longer they wait and the more integrated to two brands are the less worth lies in the pledged Max Bahr shares.

Anchorage could achieve this relatively easy through covenants in the loan agreement.

If I read the Praktiker press release correctly, this loan has not yet been executed.

However, with Anchorage in the capital structure, one of the basic assumptions of my investment case night be “compromised”. In my original post I had written:

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.

For me the worst case scenario would be that they do the “super senior” with Anchorage but for some reason the capital increase fails or only raises an amount significantly below the assumed 60 mn EUR. With a market cap of currently 65 mn EUR, this will be hard enough.

This would be then a clear sell signal for the bond. Until then I will stay in but not increase the position.