MIFA Bond (ISIN DE000A1X25B5) – Distressed debt & Restructuring “German Style”

I had covered the case of MIFA several times in the last few months (part 1, part 2, update, update 2).

Over the week-end, finally some news emerged with details about the restructuring.

If I understood the filing correctly, the following will happen:

1. Existing shareholders will be diluted 1:100
2. Bondholders will accept a “haircut” of 60% plus the coupon will be reduced to 1% (from 7,5%) and the maturity will be extended to 2021 (from 2018)
3. Hero cycles will inject (up to) 15mn EUR via a capital increase
4. Bondholders will get 10% of the new company for the 15 mn haircut and a subscription right for additional shares

Interestingly, the advisor nominated by the bondholders also made a press release. Some additional info from this release:

– the advisor estimated a recovery rate of only 15% for bondholders in the case of bankruptcy
– technically, bondholders will own 91% of MIFA equity before Hero cycle invests
– bondholders get subscriptions right and could, if they want to invest new money, own up to 30% of MIFA including those shares they get via the debt equity swap

As some details are still missing (price of new shares) etc., it is hard to correctly say how much the bonds are worth and if bondholders were treated fairly compared to Hero. However current prices at ~38% seem to imply most of the upside.

My 5 cents on this

For me, the following aspects of this whole episode are interesting:

– How can be the recovery rate of bond issued twelve months ago only be 15% ? Where did the 21,5 mn EUR disappear ? In my opinion, MIFA was a fraudulent company for quite some time and was already insolvent when they issued the bonds.

– Will there be any law suits by bondholders ? Why did Hero take the risk and didn’t wait for insolvency ? Are there any special provisions for Hero to back out if law suits come up ?

“Senior bonds” under German law should not be treated and priced as senior bonds. As this example shows, one can “haircut” bond holders under German law (“Schuldverschreibungsgesetz”) without even going into bankruptcy procedures. German Bonds are much more similar to potentially perpetual, deeply subordinated bonds or “Genußschein” than a senior bond under international law. Any covenants written into the prospectus are worth nothing as it is so simple to just restructure the bonds.

such a restructuring can be decided with only a small percentage of the bondholders. Only 28% of the MIFA bondholders were present when the advisor, who can commit to binding changes, was elected. So in theory, 14% of the bondholders can decide what happens to the remaining 86% of the bondholders with very little chance for any “hold outs”. Maybe Greece and Argentina should issue their future bonds simply under German law. Tha would make life much easier for them.

. why does the MIFA share (1% of the future company) trade at 80 cents or 6 mn EUR market cap ? Do shareholders think that the company is worth 600 mn EUR ? This is a clear “short zo zero” situation if one could actually borrow the shares

– one could argue that the restructuring makes sense because MIFA will be able to continue to operate and now jobs are lost. However I think it would be naive to believe that Hero will operate MIFA they way they worked before. Hero wants the brands and the distribution, not the production. I am pretty sure that they will not guarantee a lot of jobs.

– but at least, the order that existing equity gets wiped out before the senior bonds still holds, even under German law. I had some serious doubts about this.

The most important lesson: As I have written before, new corporate bonds under German law should be avoided at all cost. Especially the “Mittelstandsanleihen” are in principal similar 20 EUR bills issued at 100 EUR with a tiny little option to receive 100 EUR. The “lipstick on this pig” is the high coupon. But German investors seem to buy anything with a high coupon these days anyway. No surprise maybe if you have to pay for holding 2 year treasuries at the time of writing.

9 comments

  • So after all, the Indians didn’t invest and MIFA is now officially insolvent:

    http://www.n-tv.de/wirtschaft/Mifa-stellt-Insolvenzantrag-article13693536.html

  • According to Handelsblatt, there is already an investigation underway by the office of the public prosecutor against the former CEO:

    http://www.handelsblatt.com/unternehmen/handel-dienstleister/angeschlagener-fahrradbauer-staatsanwaltschaft-ermittelt-gegen-ex-mifa-vorstand/10612848.html

  • I’ve not dug into the accounts but from your story it doesn’t sound that bad:

    – Where are the 21m gone? When a company is distressed the last bond issue usually mostly goes to pay the previous round of maturing debt and other urgent or expensive creditors, with little spare cash left. I mean even with normal healthy companies, the bulk of debt issuance is rollover of maturing debt.

    – Low liquidation value? Spare bike parts and office chairs on ebay less redundancy payments is not going to leave much. It’s obviously worth somewhat more as a going concern.

    – Only 28% voting? If you don’t turn up/fill your proxy to vote you don’t get your interests represented, that’s your problem. It probably shows the bond was sold to unsuitable investors, but that’s not really the issuer’s problem (as value investors we’re always looking for muppets buying or selling to us at the wrong price after all!).

    – The recovery at 40% is almost double what the market was pricing lately so in so far as Mr Market was not too far off, doesn’t seem that bad a deal.

    – Restructuring without full bankruptcy? From a 10000 feet view this looks like Chapter 11 (compare with Chapter 7) in the US, or pre-pack admin in the UK, which is somewhat of a mixed blessing but not particularly unusual compared to other jurisdictions.

    Maybe there was some fraud on top, but it doesn’t look particularly dodgy from the facts we’ve got here.

    • Thanks for the comment. Allow me to asnwer:

      – yes, the money could be spent for debt roll over, but still there should be some assets backing them
      – nope, spare bike arts (Shimano) should have a pretty high liquidation value
      – nope, this is a legal issue. The Schuldscheingesetz should have a minimum thrshold in my opinion. Otherwise ist opens the door to all kind of manipulation
      – nope, when the bond traded at 20, there was still 7% accrued interest on top to ay
      – nope, Chapter 7 would be similar to current ESUG

      And yes, there was massive fraud on top of it. It looks very dodgy if you are not able to issue financial statements anymore right after you have issued a bond.

  • Habe der ARD mal den Link zu der Seite hier gemailt. Mal sehen, was die draus machen.
    Kurios auch, mit was für simplen Bilanzierungstricks man deutsche Großbanken Millionenfinanzierungen aus der Tasche luchsen kann. (Ok, vielleicht nur, wenn man Maschmeyer oder Jürgen Schneider heißt…)

  • Thanks for the follow-up on this one. Definitely a good educational piece. Part of the missing 21.5mn Euro were certainly paid to a rating agency…

  • Great statement.What kind of advisor is this? He didnt even ask where the money is from the debt issue.
    BTW there is a little typo. maturity will be extended to 2021 from 2018.
    Not 2012 🙂

    Cheers & and thanks again for your article.

  • Der Knaller war eine Nachricht in den MDR-Nachrichten am Samstag: MIFA kam in Probleme, da die Investoren eine zu hohe Renditeerwartung hatten 😀

    Solange so ein Schwachsinn in von uns allen bezahlten Sender läuft, braucht man sich nicht zu wundern, dass solcher Betrug straffrei möglich ist.

    Bei deinem Chart solltest du aber noch erwähnen, dass man bis Anfang August +7% Kupon zahlen musste.

    Und das Betrügen geht ja immer weiter: Schneekoppe ist jetzt auch pleite und hat kurz vorher irgendwas geändert. Die Beteiligungs-GmbH scheint rauszusein. Bei der Deutschen Forfait wurde der JA nicht vom Prüfer unterschrieben usw. usf. 😀

    • Auf beispielsweise ARD.de und anderen Medien gibt es immer wieder hämische Aufmacher über die betrügerische China-Aktien. Das wären alle Betrüger (was natürlich oft stimmt).

      Bei dt. Wertpapieren gibt keine”Kraut”-Betrügerstory! Da ist es dann einfach immer “unglücklich gelaufen” mit der Finanzierung

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