Quick MIFA update – How to “play” covenants

Disclosure: No position, for educational purposes only.

2 weeks ago I had a quick look at the troubles at MIFA, the German bicycle manufacturer.

The official version was that they had a short term problem with their accounting but no liquidity issues. This was the last paragraph of their press release in MArch:

MIFA expects to break even at the after-tax level in the first quarter of 2014. It will not be possible for the company to issue a reliable guidance concerning the full 2014 financial year until the preparation of the annual financial statements has been completed. The company has sufficient liquidity for its operating business.

So it was quite surprising that the company today, MIFA announced the following:

– The CEO is now gone forever
– they did a “sale-lease back” of their real estate to the local Government, raising 5,7 mn EUR

So to a certain extent they do seem to have liquidity issues, otherwise they would not sell their “last shirt” for cash. The more interesting part for me is the fact that “sale-lease back” is economically nothing else than a “secured loan” on the real estate.

Looking into the bond prospectus, the outstanding bond includes a so-called “Negative Pledge” covenant:

Negativverpflichtung:
Der Emittent verpflichtet sich, solange Schuldverschreibungen ausstehen, jedoch nur bis zu dem Zeitpunkt, an dem alle Beträge an Kapital und Zinsen, die gemäß den Schuldverschreibungen
zu zahlen sind, der Zahlstelle zur Verfügung gestellt worden sind, keine Grundpfandrechte, Pfandrechte oder sonstige dingliche Sicherungsrechte (jedes solches Sicherungsrecht ein “Sicherungsrecht”) in Bezug auf ihren gesamten Geschäftsbetrieb oder ihr gesamtes Vermögen oder ihre Einkünfte, jeweils gegenwärtig oder zukünftig, oder Teile davon zur Sicherung von anderen Kapitalmarktverbindlichkeiten oder zur Sicherung einer vom Emittenten oder einer seiner Tochterunternehmen gewährten Garantie oder Freistellung bezüglich einer Kapitalmarktverbindlichkeit einer anderen Person zu bestellen, ohne gleichzeitig für alle unter den Schuldverschreibungen zahlbaren Beträge dasselbe Sicherungsrecht zu bestellen oder für alle unter den Schuldverschreibungen zahlbaren Beträge solch ein anderes Sicherungsrecht zu bestellen, das von einer unabhängigen, international anerkannten Wirtschaftsprüfungsgesellschaft als gleichwertig anerkannt wird. Dies gilt vorbehaltlich bestimmter Ausnahmen.
“Kapitalmarktverbindlichkeit” bezeichnet jede Verbindlichkeit aus Schuldverschreibungen oder ähnliche verbriefte Schuldtitel oder aus Schuldscheindarlehen oder aus dafür übernommenen Garantien und/oder Gewährleistungen.

The covenants do actually prevent them to take out a typical German “Schuldscheindarlehen” against their real estate. Interestingly, an economically equivalent sale-lease back (which will be booked as financial liability) doesn’t seem to violate this covenant.

Should for some reason, MIFA go bankrupt, the recovery for the bondholders will be significantly lower than before as the real estate now belongs to someone else and will not be part of any liquidation proceeds.

I find it interesting how easy it is to circumvent such covenants with economically equivalent transaction. A reason more to stay as far away as possible from German corporate bonds in general and the so-called “Mittelstandsanleihen”. There is no “seniority” of those senior bonds, those instruments are clearly “junior” capital for German corporates. Nevertheless, bondholders seemed to like it:

It will be interesting to see if today’s bounce in the bond price is similar to what happened at Praktiker when they announced their first “rescue” and the bond price doubled from 40% to 80% before then collapsing to close to zero. Or maybe the Indians are already on their way with big suitcases full of frsh money. Who knows ? But a lot to learn for bond investors.

6 comments

  • How economically equivalent is the transaction though? In classic UK-style sales and leaseback, it is indeed, because the leases are usually inflexible with say 15 years rent due with no exit possible other than bankruptcy or the tenant finding a successor taking the place along with the often onerous lease conditions.

    If someone could sell and leaseback on a flexible lease with say 6 months notice, and/or the ability to rent only part of the space if the business shrinks, it would represent an economic change that may help saving the company, which can be good for bondholders (though in polite society respecting the spirit of the negative pledge clause, they would be asked for their agreement).

    Here the announcement doesn’t disclose the terms of the leaseback so we’re in the dark, though presumably if it’s the local authority doing it to “save jobs” they probably got a better (net) deal than the property is worth.

    • if they local government had made such a “sweet deal”, I would sue them if I was a local tax payer and not working for Mifa,

      Local governments have to deal “at arm’s length” or this would be called corruption.

      By the way, how can I get back my “Solidaritätszuschlag” ?

      • Corruption is when officials directly divert funds to their personal account, merely mistaken but well meaning attempts at economic development is possibly a waste of taxpayer money but not corruption.

        I’m also puzzled they can get away with that, perhaps the trick is that they paid a formulaic “market” valuation (based on say average square metre prices for commercial space in the region) that doesn’t account for the fact that a big site in a small place with a single large employer is worth less (or indeed maybe worthless) because a new tenant is going to be very hard to find if that one company goes broke. A formulaic valuation may well be completely legal.

        To get your solidaritätzuschlag back, what about buying a MIFA bicycle? or perhaps fly to a Ryanair local authority-sponsored airport? You could also visit Dresden and enjoy the sights. Hope this helps 😉

  • This is a somewhat more tricky situation here though. If one reads carefully, it says that the negative pledge only applies to: “[…] einer gegenwärtigen oder zukünftigen Kapitalmarktverbindlichkeit”. Hence, the negative pledge only applies with resepct to other bonds, not bank loans or sale-and-lease back transactions. This is THE major shorecoming of all German Mittelstandsanleihen to date, i.e. every time a company nears bancruptcy, the banks just secure their loans with the remaining assets, effectively subordinating bondholders. This COULD be easily healed by changing the negative pledge clause to cover all liabilities, but for some mysterious reasons, neither the issuers, nor the banks do want that. Hmm.

    • Stairway,
      the “Kapitalmarktverbindlichkeit” is defined to include “Schuldscheindarlehen”. This was the loophole in the Praktiker case. In this case it would even include Guaranties.

      “Kapitalmarktverbindlichkeit” bezeichnet jede Verbindlichkeit aus Schuldverschreibungen oder ähnliche verbriefte Schuldtitel oder aus Schuldscheindarlehen oder aus dafür übernommenen Garantien und/oder Gewährleistungen.

      mmi

      • Thanks, interesting that they changed the wording here, a bit strange that they use the word “Kapitalmarkt-” then though.

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