MIFA Update (2) – And why I would prefer Russian shares to German Bonds

The story around the German bicylce producer MIFA seems to get more and more interesting. Yesterday I posted the update on the (not so surprising) losses detected now from previuos years of dubious inventory accounting.

A few minutes after I published the post, MIFA came out with another “breaking news” which starts the following way:

MIFA: Investment agreement with Indian bike manufacturer HERO concluded,
equity investment pursuant to capital increases from authorised capital

– Investment agreement with OPM Global B.V., a subsidiary of Hero Cycles
Ltd., about an equity capital investment in the amount of EUR 15
million concluded

– FERI EuroRating Services AG reduced issue rating of corporate bond

– Annual General Meeting expected for third quarter of 2014

From the headline one would conclude that the rich Indian “uncle” finally will save the company. Handelsblatt for instance translated this into a headline which one could translate into “MIFA secures investor”.

For the real “juice” of this announcement, you have to read down a little bit towards the end of the annoncement:

The investment commitment by OPM Global B.V. entails significant financial contributions of MIFA’s financing partners and is subject to various conditions precedent, especially to the condition of a haircut in the amount of EUR 15-20 million of the bondholders as well as an exemption from the German Financial Supervisory Authority (BaFin) from the obligation to make a public takeover offer under the The German Securities Acquisition and Takeover Act.

So to understand this again, the facts:

– The 2013 issued MIFA bond has a total volume of 25 mn EUR
– most likely, the covenants of the bonds are breached, so MIFA would have to pay back the bond on short notice
– the “Indian uncle” will only invest, if bond holders accept a haircut of 60-80%

Normally, if a company cannot pay back a bond, the company will go into default. the shareholders will be wiped out and the company then changes ownership from the shareholders to creditors i.e. bondholders for instance via a debt/equity swap.

at MIFA, they try to reverse the order. Let’s look at another part of the announcement: Hero is commiting to pay 15mn for the following shares:

The cash capital increases shall comprise a 10% capital increase with subscription rights being excluded and a subsequent rights issue with a total number of 4.9 million new shares to be issued. OPM Global B.V. has undertaken to subscribe all such shares which together with additional existing shares to be transferred from
certain existing shareholders would result in an overall participation of the investor of up to 47 %.

With currently 9,8 mn shares, only (0,98 +4.9) = 5.88 mn new shares will be issued. With a total new sharecount of 15,68 mn shares, the old shareholders would keep economically (9,8/15,68) =62,5% of the company while senior bondholders would keep only 20-40% of their bond prinicpal. In my opinion it should be the other way round.

It will be interesting to see if bondholders are accepting this pretty obvious blackmailing. The argument will most likely be that if they don’t accept, they will end up with nothing. Praktiker by the way tried a similar tactic, going to bondholders first . In Praktiker’s case, both shareholders and bondholders ended with nothing.

That the proposed transaction would be better for shareholders than for bond holders shows clearly in the price action this morning. While the bond lost further from around 33% to around 27% (or -20% in relative terms), the shares are up more than +20% at the time of writing.

Coming back to my headline: When i bought my first two small Russian share positions (Sberbank, Sistema) many people commented that they would never buy Russian shares because property rights are not respected in Russia. This might be even correct, but you get very cheap valuations and if they do respect property rights, tzhe potential upside is high.

In German bond markets however, property rights are even worse in my opinion once a company is in trouble. As we learned at IVG, subordinated bond holders can be wiped out without blinking an eye and looking at the last few cases, senior bond holders are now expected to rescue the company before shareholders commit a single cent. Under German insolvency proceedings, often the old management carries on (WGF) and wipes out bondholders as they wish. However, other than in Russia, there is no upside to this if you buy a newly issued German bond at par. So for me, if I would need to choose between a newly issued German Corporate bond and a Russian stock, the choice is clear….

The sad part of this story is that this event along with many other similar event will hurt corporate bond issuance in Germany in the long run, especially for smaller companies. With the banks continuing to shrink, this is not good news for those German Mittelstand companies who need debt funding.

I am somehow tempted to become a “bond activist” here….Let’s see how this continues….

8 comments

  • “Diese Anleihegläubigerversammlung in Form
    einer Präsenzversammlung findet am 23. Juli 2014 um 11 Uhr im Sitzungssaal
    der Klaus Ehrich GmbH Wirtschaftsprüfungsgesellschaft
    Steuerberatungsgesellschaft, Kyselhäuser Straße 8 in 06526 Sangerhausen
    statt.”

    Wie da einige noch 28% + fast einen Jahreskupon vor wenigen Tagen gezahlt haben, das kann ich nicht so ganz verstehen. Selbst jetzt 23 % + fast einen Jahreskupon sind noch zu viel.

    Immerhin clver gelegt. Kurz vor die Kuponzahlung. Mitten in den Ferien und dann noch kurzfristig angekündigt 😀

  • gab wohl nur 24,x % der Stimmen und somit zu wenig Teilnahme

  • Your timely coverage of MIFA was great.
    It is true, shareholders and the c-suite like screwing bondholders. This kind of behaviour is rahter widespread right now. Its not a special german flavour of insolvency.
    SME-lending in Germany has never really developped.
    People always like to point out that the EU and the USA have the same GDP but the european banking system is four times larger. On the other hand, their financial system is far larger than the european one. My hope is that by shrinking the banking system we make room for non banking players who can serve the financial needs of small companies in a more bespoke way.

    • hemlock,

      thanks for the comment. It is true that senior bond holders get screwed often, but always from more senior parts of the capital structure. What’s new here is that the junior equity holders try to screw the seniors. German law seems to make this possible.
      mmi

  • I did get into this file, but HERO states it would control 47% post deal while you calculate it to be 37.5. Does this imply that HERO is already a large shareholder? And perhaps not a bondholder? That might explain this crazy deal.

    • No, part of the 515 mn will be used to buy from old shareholders. However from whom and for how much is not disclosed. I assume those are the shares from the former CEO.

  • A haircut of 60-80% wouldn’t be the worst deal, but perhaps it would be better to convert debt into equity as we have seen at GM and Chrysler. In 2009, GM said 90 percent of bondholders must tender their holdings or it will be forced into bankruptcy. For $27 billion they received 10 percent of equity, if I remember correctly, now worth $5 billion.
    However, preferential treatment for existing shareholders would be highly questionable.

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