The weekly IVG post – more info on hedge fund activity

Thanks to a reader, I got this piece of information:

23-Apr-13
19:04
IVG eases constraints to secondary buyers to open direct talks with distressed investors

Story:
German real estate group IVG Immobilien lifted restrictions for secondary buyers of its corporate loan facilities last week, two sources familiar with the situation said.

With distressed buyers rapidly moving into IVG’s bank debt, management decided to remove hurdles for alternative investors, who had so far been forced to sub participations. Around EUR 500m loans moved into the hands of hedge funds and other distressed investors in the past month.

“The company simply found out that a lot of its bank debt had changed hands and inevitably would need to deal with these people [hedge funds] in the next months,” the first source said. Under the loan documentation, secondary buysiders needed the company’s approval to become lenders of record. With restrictions in place, new buyers would have been left out of the negotiating table in the restructuring process and forced to act through the mediation of the bank which sold the debt piece at discount to the fund.

The Bonn-based group announced it would restructure its capital structure on 27 March taking a holistic approach to the workout of its capital structure. Negotiations will include senior lenders, convertible holders, hybrid holders, and shareholders as the company aims to reach an out-of-court agreement.

“As a distressed debt holder you would have had a seat only through the bank you had bought from,” the second source commented.

“For IVG is better to lift restrictions and talk straight to the distressed investors. The easing of the constraints could help broaden the buyside space and support the price of the loans going forward,” the first source noted.

Following the EUR 500m trades earlier in April, another EUR 200m debt piece has been shown to potential buyers since Thursday of last week, including a EUR 100m strip of syndicated loan 1 and a EUR 100m tranche of syndicated loan 2. The two pieces, issued in 2007 and 2009 respectively, both mature in September 2014 for a combined bullet repayment of EUR 2.11bn.

The 2007 syndicated loan 1 is currently indicated in the 81 area, while the 2009 syndicated loan 2 is seen at 91, the two sources and a trader said.

The two loans are secured against different assets, with the 2007 syn loan 1 looking undercollateralised and the 2009 syn loan 2 marginally overcollateralised at book value, the first source said.

“From this, you need to calculate what the recovery value is in terms of distressed scenario,” he added.

“I would still wait before going long on IVG bank debt,” a buysider commented. “We went private, but there’s very little clarity on asset coverage. Using some market comparable, I would feel comfortable buying into the syndicated loan 1 only below 70.”

Under the EUR 2.11bn of loans due in September 2014 and around EUR 740m of project financing loans and other facilities, sit EUR 400m 1.75% unsecured convertible notes due 2017 and EUR 400m 8% perpetual hybrid notes. Both bonds took a dip in the last few days.

Convertible notes tripped down around 20 points to the low 50s in the last 10 days as bondholders are increasingly seen at risk of full equitisation, the first source commented.

“In a windup situation, converts could end up out of the money,” the first source said.

Convert holders could exercise a put for redemption at par in March 2014 to get their money back before the senior facility is due in September. However, senior debt holders could notify the company they are not going to refinance the September facilities, which would mean IVG would not be a going concern anymore.

Perpetual notes are indicated in the mid 10s, down around seven points in the same period, the trader said.

While the company hired Rothschild and Freshfields Bruckhaus as financial and legal advisors respectively, the creditor classes have appointed no advisors yet.

by Luca Casiraghi

Source:
Debtwire

In my opinion, the most interesting pieces on that report are

a) the pricing points: 81% for the undercollateralized loan and 91% for the collateralized

For, this reinforces two of my arguments (but again, I am surely biased):

– those buyers do not apply huge haircuts to the collateral (if they pay 90% for the 110% collateralized loan)
– In my opnion, it does not make sense for a HF to buy the collateralized loan at 91% if you expect insolvency and a 2-3 year workout period. To me this looks more like the “molest the other banks” strategy.

b) interestingly, the funds bought in on a kind of “Non voting” basis. In the syndicated loan markets, usually one has direct members of the syndicate at the beginning. As there is always some trading going on, banks sometimes sell the loan on a “sub participating” basis to a third party. Without the approval of the lender, those third parties have no vote if something has to be changed with the covenants etc.

So the price paid for those first tranches includes a certain discount for the risk that for some reasons IVG would not grant those rights to the buyer. One can compare this to buying a pref share instead of a common share.

All in all, this kind of reassures me that the probability for a “hard default” at IVG is maybe a little bit lower than some market participants think.

BUT AGAIN THE DISCLAIMER: DO YOUR WON WORK. I CANNOT RECOMMEND BUYING IVG SECUTITIES TO ANYONE. THIS IS HIGHLY RISKY WITH AN UNCERTAIN OUTCOME

3 comments

  • As far as understtod from the prior posts the converts can not be forced under the ESUG legislation into a debt-to-equity swap (§ 225), since the bond has been issued under Dutch law and a swap would be voluntary. But it is still quite likely that the loan holder will try to put some pressure onto the bondholders to take at least some kind of voluntary haircut. The outcome will then depend on their assumption of the potential recovery value. So we should sharpen our pencils again and do our homework…

  • I wanted to ask “Why does it not make sense…”…the word sense ist missing above ;-(

  • Why does it not make to strip off the hybrid and maybe the convertible debt via ESUG and then switch the collateral debt (partly) to equity? You would create a brand new IVG with no or reasonable debt…just screwing the shareholders and lower ranking debts. At least one main shareholder (Santo) already started to leave the sinking ship..

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