Category Archives: IVG Convertible

Short cuts: IVG, KPN, ThyssenKrupp


Friday night or Saturday is always a good time for another “breaking” news item about the IVG restructuring. This time they came out with an outline of the restructuring plan.

As expected, equity and hybrid capital are effectively wiped out. What I found highly surprising however is this part:

Further, it is, inter alia, envisaged that SynLoan I and the convertible bond will both be transferred to the company by way of a contribution in kind with 100% of their respective face amounts (so-called debt-to-equity swap), which would lead to a quota-ratio of these two creditor groups’ share in the stated share capital of 80% (SynLoan I) to 20% (convertible bond).

This is a great surprise that although collateralized, the Syn loan I is treated “pari passu” with the convertible. I do not fully understand this, but maybe the collateralization has happened to late (and too close to potential bankruptcy) and would have been invalid in case of bankruptcy. This explains the price jump in the convertible this morning I guess.

As usual in such cases, I am surprised that the equity is still valued at 35 mn EUR.


Interesting development at KPN: After KPN decided to sell its German Eplus subsidiary, Carlos Slim canceled the “stand still” agreement and is now bidding for KPN. I think this will be interesting to watch, as KPN surely doesn’t want to be acquired. I am pretty sure, they will come up with some defences like poison pills etc. Nevertheless I clearly sold out too early . I think I underestimated the “calros Slim” angle here.


ThyssenKrupp might be an interestign “special situation in the making”. Last week, Berthold Beitz, the 99 year old industrialist who efefctively controlled ThyssenKrupp via the Krupp foundation, passed away. Rumours about an accelerated capital increase are emerging.

It is interesting to see in the shareholder structure that a lot of German inevstors got out (Deka, Union) and Anglos Saxon investors got in in the last few months. This could become really interesting.

Friday night IVG Bombshell

Friday night, 8 pm seems to be a good time to land a real bombshell. IVG distributed an Adhoc notice with some update information about the upcoming restructuring.

Among other stuff, the comment on potential recovery rates in a liquidation. This is the German original:

ergäbe folgende Befriedigungsquoten: ca. 96% bis ca. 100% für Objektfinanzierungen (Carve out debt), ca. 86% bis ca. 89% für den syndizierten Kredit von 2009 (Syn Loan II), ca. 46% bis ca. 55% für den syndizierten Kredit von 2007 (Syn Loan I) und ca. 27% bis ca. 41% für die Wandelanleihe. Die Gläubiger der Hybridanleihe und die Aktionäre der Gesellschaft würden in diesen Fällen voraussichtlich jeweils keine Befriedigung erhalten.

So nada/niente/rien for Hybrid and Equity and only 27%-41% for the convertible. This is significantly below the latest trade of around 58% as of today.

After all, my summary from May seems to be spot on:

the likelihood of IVG “surviving” long term in my opinion is very small or even zero. So equity and hybrid should be avoided

I am really glad that I sold out:

Overall, for the portfolio I would for the time being sell down the position at current rates and eat the loss. I am pretty sure that I am too early but as I know that I am a rather bad short term speculator, I want to play this safe.

This is by no means over yet but it doesn’t look good.

Interestingly, Third Avenue seemed to have bought into IVG earlier this year. That’s what they say in their last shareholder letter:

Our analysis determined that the IVG Convertible Bond swere most likely the “fulcrum” security in the capital structure. In other words, holders of the IVG Convertible Bonds are likely to participate in a debt-for-equity restructuring, and the subordinated securities(preferred and common) would retain little or no value. IVG Convertible Bonds mature in 2017, but holders have an option to put the bonds to the company in 2014. The Fund purchased approximately 5% of the outstanding IVG Convertible Bonds at an average cost of sixty-eight cents on the dollar. As a larger holder,we anticipate having a seat at the table with the company

Man, that sounds really stupid. Even I had found out that the “fulcrum” security were the loans. it seems to be that Marty Whitman’s successors got a little bit sloppy.

So let’s get some Popcorn and watch what will happen on Monday.

Some more thoughts on IVG & “ESUG” special

As always do your own research. Don’t follow tips blindly. In this specific case I would not recommend any private investor to invest in this security as the situation is very complex and more bad news should be expected.

Just a remark at the beginning:

Some people asked me why I post so much on such a crappy company like IVG and do not post more about “great value stocks” like IGE & XAO. The answer is quite simple: First, I don’t find that many attractively priced value stocks any more. Secondly, the blog was always meant to be a value AND opportunity blog. Opportunities in my definition are one-off situations where the payout is relatively independent from overall market movements. Additionally I think the IVG case is so interesting, that it would be a crime not to look at this in detail. Complicated capital structure, new German insolvency law, US hedge funds, real estate exposure etc. There is so much to learn here.

Back to IVG:

Lets start with a question from the comments:

Now regarding the convertible I have some questions
1) Going concern scenario:
a)How likely is it in your view that they keep as a going concern in 2014 (ie are able to refinance the convertible)
b) At what value will IVG refinance the convertible
c) How are they going to do it (sell property, give equity …)
3) Bankruptcy
a) How much will be the recovery value
b) How long does to realize the recovery value
c) Is the IRR worth it?

Well, the answer is: I don’t know. But we can start with a very easy guess (and of course everyone can criticize and make it better):

1) Start with 50/50: That would be the base assumption if you don’t know better with every binary “option”.

At the current price of ~60% we can work back the recovery quite easily (very simplified:

60% = (0,5*100 %) + (0.5*x%) with x being the recovery.

So the implicit recovery would be (60%-50%)/0.5= 20%.

But attention: those 20% would represent the market value of the then defaulted security. If we assume that the workout period is 3-5 years in a real “messy insolvency”, and buyers of defaulted securities charge at least 20% p.a., then this implies a current recovery value between 20% * (1.2)^3 = 35% and 20% * (1.2)^5 = 49%.

So to make this clear: If the current ultimate recovery is 50% and they need 5 years to distribute the liquidation proceeds, the current price of the convertible is a fair price !!! It would be a very big mistake to calculate the current value of the underlying assets and not take into account the time delay. (This is by the way one of the lessons from Zeke Ashtons presentaton to which I linked in the last post).

As I mentioned before, in my opinion, the current asset value is more like 80%, so I would expect (immediately after insolvency) a price range of 32%- 46%. Based on a 50/50 percentage, this would move the current fair value to a range of 62-73% of nominal, slightly above the current value of 60%.

Based on this binary scenario alone, I guess the convertible bond would not merit an investment at the moment, as the downside is quite significant.

However as most things in live, also the IVG situation is not binary. As it was discussed in the blog already quite a few times, some hedge funds are looking into “restructuring” the company without a liquidation in the end.

Logic behind the restructuring idea – REIT & Taxes

In my opinion, the restructuring idea does have some logic and might even create value. Why so ?

As far as I understand, the Hedgefunds want to lower debt in order to be able to transform IVG or a part of it into a REIT and in that process sell down/spin-off the other stuff like the asset management and the Caverns.

IVG in its current form does not make a lot of sense for investors. If you invest int IVG because of the real estate, the profit gets taxed 2 times, once on the corporate level and then again on investor level. A real estate investment via a REIT gets taxed only at the investor level, there are (almost) no taxes on the corporate level. If we assume 30% taxes, a fully equity financed real estate portfolio would be 30% more valuable in a REIT than in a normal company. Adding debt reduces the difference but even with debt at the level of IVG, there is still a tax disadvantage of maybe 15% or so of the current IVG vs.a REIT.

Another point which might make a restructuring event much more likely than a liquidation are taxes. On the one side I assume that the DTA will stay in a restructuring event, therefore greatly enhancing the overall value, secondly, there is no need to sell the real estate and pay property transfer taxes (up to 5% in Germany). So the restructuring alternative sounds like a no brainer compared to the liquidation scenario for almost every party involved in this.

How would/should the restructuring work (“ESUG”) ?

Well, this is the hard part and I do not have a lot of experience with that in detail. Plus we have a relatively new insolvency law in Germany (“ESUG”) which has not yet been tested in such a big case.

Let us look into the “ESUG” (“Gesetz zur Erleichterung der Unternehmenssanierung”) a little bit more closely. ESUG is meant to bring the concept of the American chapter 11 to Germany. Up until now, it was very difficult under German bankruptcy law to really restructure a company. The new “ESUG” which came into effect in MArch 2012 should change this.

However, until now there are not that many succesful restructuring stories in Germany.

If one googles “ESUG” one can find a lot of issues with the new law, for instance here at WiWo or here at Handelsblatt.

The best overview about the current status of the ESUG that I found was this study from Roland Berger. A very good document how the debt/equity swaps works can be found here.

To summarize what I have learned from this:

– there seems to be a big issue currently for holders of subordinated bonds, as they are not represented separately within the ESUG process. Another reason to avoid the IVG HYbrid.
– so far, there is no precedent for a debt/equity swap. Unchartered territory so to say, especially for senior unsecured holders
– However, there seems to be checks and balances in place that unsecured holders receive shares etc. according to the “fair value” of the claims.
Decisions are taken by simple majorities. I guess this is done by debtor group. So “hold-outs” do not really matter in the restructuring scenario anymore

What does that mean for IVG ?

In my opinion, the restructuring case via ESUG is the most likely one. Thinking it through, it is even for the convertible holders most likely a lot better than liquidation. The DTA could remain in place (and have value), one doesn’t have to pay property transfer tax etc. The question is clearly how much of that value will be shared by the “super senior” creditors.

One the one hand, IVG will be “THE” test case for the new law and people involved (advisors etc.) will make sure that senior holders will be treated fairly to a certain extent so that this kind of restructuring will happen more often (and create fat fees for advisors….). On the other hand, the Distressed debt players with a lot of restructuring experience could try to use this to make a absolute “killing” on the back of the unsecured holders. As the Jackpot is quite high with 4 bn plus, this is a real concern.

So after this preliminary ESUG analysis, I think now that the restructuring event is very likely.

Back to the calculation

So finally back to a calculation of a fair value. Staying with simple 50/50 rules I assume the following:

1) There is a 50% chance for a proceeding according to ESUG. Within the ESUG process, I assume with 25% propability that the unsecured holders get screwed (25% recovery), and a 25% probability that the unsecured holders get a fair share (75% recovery)
2) for the remaining 50% probability I will again divide into 25% for the payback at par and the liquidation scenario.

So my current fair value for the convertible looks like:

0.25 x 75% + + 0.25 * 25% + 0.25 x 100% + 0.25 x 40% = 60%

Of course, this calculation is highly subjective and any of the assumptions can change pretty quickly and will not remain stable over the course of time.

So under this asumption, the convertible is fairly priced, no big upside from an intrinsic value point of view.

What now ?

To be honest, I am not so sure anymore. Do we see something like a short bounce if they come up with some sort of rescue attemptlike at Prakiker ?there I got out too early, howver now the bond is already back to deeply distressed levels:

I would argue that this is less likely for IVG as the small investors will not touch this due to the high nominal value and the “pros” are a little bit more cautious here.

On the other hand it could be an interesting situation once the “ESUG” restructuring is running or even as restructtured equity play.


Looking a little bit deeper into the different possible outcomes, for me a few important take aways remain:

– the likelihood of IVG “surviving” long term in my opinion is very small or even zero. So equity and hybrid should be avoided
– the restructuring scenario (ESUG) might not be so bad for the senior bonds as many fear although it is unknown territory
– there is still the possibility that IVG manages to repay the convertible at par, but it is not very likely as for most secured creditors, a ESUG style reorg would not hurt that much
– buying inot the secured loans at 80% looks like a lot better value, however I can’t do this as private investor

Overall, for the portfolio I would for the time being sell down the position at current rates and eat the loss. I am pretty sure that I am too early but as I know that I am a rather bad short term speculator, I want to play this safe.

To Do: Read more about ESUG. Any tips for a good book are highly appreciated !!!

As always do your own research. Don’t follow tips blindly In this specific case I would not recommend any private investor to invest in this security as the situation is very complex and more bad news should be expected.

IVG – JPM Research on property values

A friendly reader forwarded me a current equity research report from JPM about IVG.

Not surprisingly, they estimate the value of the share as zero:

Our EVA based European
Valuation Model implies zero value for IVG ordinary equity as a going concern, while a DCF driven revaluation implies zero equity value on the existing balance sheet. We therefore lower our Mar-14 EVM based price target from €2.22 to €0.01, and await the announcement of restructuring plans over summer 2013.

Although one might wonder, why they had a 2.22 EUR price target before. Much more interesting is that they actaully come up with an asset value for the IVG portfolio which looks as follows:

ivg jpm valuation

Although they use slightly different adjustements, thei asset value is very similar to what I calculated a couple of weeks ago:

2011 Adj. Val 2012 Adj.Val Comment
Intangibles 251 0 253 0 100% write off
Inv. Property 3,964 3,398 3,654 2,920 scaled to 7% yield
PPE 157 118 190 143 25% discount
Financial Assets 189 142 174 131 25% discount
equity part 95 71 84 63 25% discount
DTA 404 0 336 0 100% write off
Receivables 60 45     25% discount
Inventory 1,025 513 996 498 50% discount
Receivables 179 134 190 143 25% discount
Cash 238 238 142 142 0% discount
AFS 341 256 58 44 25% discount
Asset Management 275   318 1.5% of AUM
Marekt value caverns 163   140 50% of disclosed adj.
Total 6,903 5,351   4,540

Additionally, they calculate “Bull” and “bear case” scenarios:

ivg bear case

The bear case scenario clearly would not leave a lot for convertible holders.This clearly shows the risk of the implicit “leverage” of the secured loans via the convertible.


Although the JPM research looks a little bit superficial especially with regard to the liability structure, it is definitely worth to look at in order to get a better feeling for the underlying property values.

Their base case would imply even “full recovery” for the convertible and hybrid, although I think they haven’t modeled the liability structure correctly.

In general, their asset valuation does not look to different from mine,so for the time being I don’t see a reason to sell the convertible at current levels. Also there seems to be no reason to approve any debt for equity swaps.

However both, equity and hybrid capital seem to be clearly out of the money in most scenarios if one takes into account the full liabaility structure.

The weekly IVG post – more info on hedge fund activity

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

IVG eases constraints to secondary buyers to open direct talks with distressed investors

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


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.


IVG again (and again and again)

disclaimer: The discussed investment is very risky and not recommended for any investor. There are strong hints of insider trading and permanent loss of capital and permanent loss of principal is quite likely. The author owns the investment and is clearly biased towards a positive outcome

Thanks to a reader, I received some “research” about IVG directly out of London, HF and “predator” capital (highlights are mine):

IVG – Further Thoughts

I had the opportunity to talk to the company late on Friday. I remain public on the name and have not received private information…

As one would expect, the company would not give any details of proposals being discussed with stakeholders; however, the company admitted that it had considered a number of options for repaying the convertible and deleveraging the company (which became necessary when the synloan holders indicated they wouldn’t be able to refi in September 2014)… including a rights issue which wouldn’t work due to the size required and the status of the hybrid and a quickie disposal of the SQUAIRE which would have seen a very significant discount to book.

A couple of things became clear:

· The company views the equitisation of the convertible and the hybrid as being the necessary first step in a restructuring process
· The haircut may also have to apply to the syndicated loans – especially SynLoan 1 which is under-collateralised
· The company’s fervent hope is to avoid any type of insolvency through a consensual agreement. Any type of restructuring under insolvency is currently considered a distant ‘Plan B’
· The company believes that significant value could be generated for equity investors through the continued management of the SQUAIRE and in the unencumbered caverns currently due to be delivered to Cavern Fund II in c. four years
· The company’s major shareholders are supporting the restructuring proposals – at least from their position on the Supervisory Board; that doesn’t mean that they will vote for restructuring at the AGM…
· Any new capital would require 75% approval at the new AGM
· The convertible bonds will require 100% vote of those attending a general meeting (quorum 50%); but that could be lowered to 75% under a new German Scheme
· It looks like Plan B may well be the more realistic proposition…

The German market is relatively short of ‘prime’ office space… prime would mean significant property located in the centre of major cities like Berlin, Frankfurt, Hamburg and Munich. IVG categorises most of its property as located in these cities. However, more properly it should be described as near one of these cities and very little of the investment portfolio could be described as prime… Prime properties still command premium rentals, non-prime properties face significant competition and rents are likely to fall on the renewal of tenancy agreements. The company states that €2.25bn is core/core+, €690mn is value add (needs work or on short tenancy) and €250mn is workout… in an insolvency the core/core+ valuations would come under pressure; the latter two categories may well be reflective of a going concern but I believe could well be significantly haircut in an insolvency… Furthermore I place little value in the €264mn ‘future caverns’ given the lack of interest from utilities; the fund valuations could come under pressure if EuroSelect 14 does indeed default; and tax assets are hard to transfer.

The company confirmed that:

· The debt on the SQUAIRE represent c. 60% LTV; the rental currently covers interest and the cover will improve. The company expects this debt to roll when it falls due at the end of the year
· The company also has a Core Financing: currently €570mn vs. assets valued at €800mn
· The Pegasus loan is currently €140mn and is secured on a variety of properties situated all over Germany and valued at €300mn
· SynLoan 1 is under-collateralised; I got the impression that less than 75% of the loan had collateral
· SynLoan 2 is over-collateralised but I have the impression that not by much… c. 90% LTV; obviously it benefits from the caverns disposals which should generate €300mn by the end of 2014

It would seem that it would be in the best interests of all of the stakeholders to keep the company a going concern, otherwise one can make a case that even the collateralised parts of the syndicated loans could be haircut.

Andrew Carrie ** 22nd April 2013 ** ** +44 20 7997 2066

In my opinion only 2 parts of that “research” is interesting:

Number 1:

The company views the equitisation of the convertible and the hybrid as being the necessary first step in a restructuring process

This is the same kind of b…s… I have heard in the first few Praktiker calls. The answer is simple: Nope. The first step is that equity gets wiped out, then Hybrid then senior. However it clearly shows that will go down the same path as Praktiker tried and ask the bondholders for deferral.

If for some reason, they would succeed, this would in my opinion kill the complete (high yield) corporate bond market. If it is suddenly possible to change the sequence in teh capital structure, why should then be corporate spreads where they are at the moment ?

Number 2:

This is the really interesting part:

SynLoan 1 is under-collateralised; I got the impression that less than 75% of the loan had collateral

In some boards people were arguing: If a collateralized loan is sold at 85%, this is the proof that the senior is worthless, as even the collateral for the first priority loans is not sufficient. To be honest, I was struggling with that one most.

Well, this argument now doesn’t hold anymore. If in reality, the Synloan is only collaterallized at 75%, then a price of ~85% is in line with the current pricing of the convertible.

The uncollateralized part of the Synloan is “pari passu” with the convertible. So in case of the bankruptcy, synloan holders would get full repayment on the collateralized part (75%) plus pro rata repayment with the convertible which trades around 55%. The “fair value” of such a Synloan would therefore be 75% + (25%*0.55)= 87.5% and therefore absolutely consistent with current convertible prices.

If we assume that the buyers have quite high return requirements, then I think the fear of a zero recovery for the convertible gets even more unrealistic.


If only for this one piece of information, the “research” as superficial as it is has greatly increased my confidence in the IVG convertible, because suddenly the prices paid for the more senior but partly uncolateralised loans makes sense.

One should still expect a very bumpy ride with “Praktiker style” attempts to bail in the convertible holders before anyone else, but at current prices, the risk/return relationship looks very good to me.

Again a disclaimer: “Don’t do this at home” and I might be subject to confirmation bias.

IVG Convertible and distressed debt in general: Beware the “predators” – but don’t panic either…

It is quite interesting to read the comments to my latest IVG post and elsewhere. The overall sentiment seems to be quite negative. I think this is also partly due to some recent bankruptcies in Germany’s fledgling “Mittelstand” corporate bond market, where a couple of companies with really bad balance sheets issued bonds and defaulted quite soon afterwords. Very often, recovery rates were low double digits or even single digits.

Investing and evaluating bankruptcy situations is very complex. You have to figure out two things in order to come up with a value:

1. The probability of the company going bankrupt
2. The recovery in case of bancruptcy

The valuation of the bond is then pretty straight forward. However, before going there, maybe we should take step back and

Why do companies go bankrupt ?

In general, companies do not go bankrupt voluntarily because first and foremost the equity holders and owners will object strongly. Once a company is in bankruptcy, the game is over for equity owners, however as long as the company “lives” there is always a chance (or technically the option) that things turn around. So an equity holder will always try to stay in business.

Also management usually has not a lot to gain from bankruptcy and will try to hang on as long as they can to their posts and receive salaries. This is also one of the reasons why in many jurisdictions, not filing for bankruptcy although you are in a unsolvable position is considered a crime. In German, this for instance would be called “Insolvenzverschleppung”.

Usually, it is creditors who “pull the plug”, either by not rolling debt or by enforcing covenants which usually are part of standard bank loans. “Normal creditors” like banks and normal bond holders also don’t really like bankruptcies, they prefer their bonds being paid or rolled over. For a normal bank for instance, there is no upside to simply enforce a loan covenant if there is still a high chance that the company can survive. Enforcing a covenant for a normal bank usually means that they have to swap their loan into an asset with a much higher capital requirement.

So what banks normally do is that they will press for more equity and/or a higher coupon but normally they prefer the company to stay in business because seizing the assets does not provide a lot of upside, as the bank at max gets its notional back.

However “normal” creditors get nervous if a debtor is loosing money and the underlying assets pool is shrinking fast. If a bankruptcy is more or less unavoidable and the asset pool is shrinking, than the logical way is to press for bankruptcy as fast as possible in order to protect the downside.

Introducing the “predators”

However there is also another group of creditors: So called “vulture funds”. Those guy usually come in if a company is in some kind of trouble, but there is still enough collateral.

Their strategy is quite simple: They try to enter the capital structure at the most senior level at a discount. Those discounts often appear, if for example a bad bank is set up and people want to dispose legacy assets as soon as possible.


Assume, secured loans of a troubled company with a maturity of 5 years are sold to a “distressed debt” fund at 60% of nominal. The interest rate is 5%. By holding it until maturity, the fund will earn 13.7% p.a. if everything goes OK. This is nice, however distressed debt claims to earn as their Private equity investors more like 20-30% ROEs.

So how can they increase their annual returns ? The answer is simple: Try to enforce bankruptcy as quickly as possible and sell the collateral. So for the example from above I made two further scenarios: either bankruptcy after one year or direct bankruptcy.

Period 0 1 2 3 4 5
HTM -70 5 5 5 5 105
IRR 13.7%          
Bankruptcy after 1 year -70 5 0 100    
IRR 15.1%          
Direct bankruptcy -70 0 100      
IRR 19.5%        

So in this simple example, the principle is quite easy to see: For a “distressed secured” buyer, the earlier the bankruptcy, the higher the returns.

How can a predator enforce bankruptcy ?

The usual way to do this is to enforce “broken” loan covenants. Normal bank loans contain certain minimum thresholds, often with regard to debt/equity or debt/asset ratios as well as interest/income. If those thresholds are not met anymore, usually the debtor has a certain “cure period” to fix things. Otherwise, the loans will become “due”. In normal cases, banks will not have an incentive to enforce the covenant. So they will renegotiate the covenants but demand extra collateral and/or a higher coupon.

A “predator” however, wil try to enforce the covenant in order to get his hands on the collateral.

In general, syndicated loans (i.e. a big loan which has been split up between a group of banks) will require a majority vote to actually renegotiate loan covenants. And that is where it gets interesting.

“Distressed debt” funds normally apply 2 strategies to accelerate their returns:

1) Enforcing bankruptcy
2) Blackmailing the loan syndicate

The second strategy is basically a game theory thing. If you have enough share of a syndicate to block decisions, sometimes those creditors who cannot afford a bankruptcy process will buy off th “predators”. This is often even better than going through the liquidation process.

Back to IVG: What does it mean here ?

Well, that’s easy: Look out for the predators !!!

As those guys smell the blood quite early, they have of course already arrived, at least according to this interesting piece of news from Reuters:

German property company IVG Immobilien is attracting attention from distressed debt investors as some lenders seek to cut their exposure to avoid potential heavy losses in a restructuring of its 4 billion euro ($5.3 billion) debts.

Between 400 million euros and 500 million in loans have been sold in three trades recently by banks looking to reduce or exit their positions in IVG and more trades are expected to occur in the coming weeks, bankers said on Friday.

And even more interesting:

IVG was not immediately available to comment.

The loans were sold to investors at around mid-80 percent of face value, a level considered to be distressed in Europe’s secondary loan market, bankers added.

IVG had outstanding debt of almost 4 billion euros at the end of 2012, comprising mostly bank loans, 3.16 billion euros of which are due to be refinanced by the end of 2014. IVG is close to breaching covenants on its debts.

So the predators are there, time to panic and sell the convertible ?

Not so fast. In my opinion there are 4 reasons why one should not panic:

1. The covenants are not broken yet, so there is no way to enforce the covenant here and now.
2. The price levels mentioned here does not justify a liquidation in my opinion. If you buy at 85% and you liquidate, then you will get money only within 2-3 years. This would be a single digit return at this levels
3. The amount traded does not provide a majority in any of the loan tranches.
4. There is a lot of money in the market chasing “high yield” paper, therefore improving IVG’s chance for refinancing

So for me it looks at the moment rather like a blackmailing strategy as discussed above, where the syndicate banks shall be forced to buy out the predators. Even if the predators go for liquidation, the question is how quickly they will be able to enforce the covenants.

Sometimes, “predators” run even more sophisticated schemes errrh strategies. One strategy for example would be Blackmailing as described above plus then investing in other parts of the capital structure at even more distressed prices. So the funds mentioned above could threaten the company and hold up the negotiation process only to purchase for instance the convertible at a very low price. At the last moment, they could then agree to a restructuring (or sell to the other banks) and harvesting the upside on the convertible.


With the arrival of the “predators”, renegotiation for IVG will become more difficult. For the time being, it rather looks like a typical distressed debt “blackmailing” strategy, aimed at the other consortium banks. However this could change.

On the other hand, at current levels (66%-67%), a lot of bad news seems to be priced in, giving convertible holders an upside of > 50% in less than a year if the convertible gets paid in full.

Even in a liquidation scenario, I do not believe that we see such low recoveries as in other German cases in the recent past.

So for the time being, I am considering if I add carefully to my position if the (expected) bad news arrives. I am pretty sure the next call with management will be a disaster, so this could be a good entry point.

IVG – Now what ?

IVG is one of my special situation investments, I had detailed posts about them here:

Introduction (German)
“Good news” (German)
Capital Increase
Capital Structure considerations
Balance sheet analysis

My overall thesis could be summarised as follows:

IVG is clearly in troubled water, so the shares and the Hybrid bonds are extremely risky, however the senior convertible which has a put in early 2014 has a good chance of being repaid. My main argument was and is that IVG is quite big and an outright default would have too bad consequences for the banks and hedge funds wer not yet involved. Even in the downside case, I would still come up with a recovery for the Hybrid in the 90ties due to the amount of underlying equity and hybrid debt.

Last week however, IVG came out with another worse than expected annual result for 2012.

The “bomb” however was this statement:

As the company would like to explain the financing concept being developed to the shareholders and to allow them to decide on specific measures, where appropriate, the 2013 Annual General Meeting will be postponed from 16 May 2013 to presumably the end of July 2013.

Well, clearly postponing the Annual Meeting is ALWAYS a bad sign. So all the listed IVG securities got of course hammered:

The stock lost around 2/3 of its value:

as well as the Hybrid bond:

The convertible lost almost half of its value before rebounding, resulting in a loss of 1/3:

So to look at the only positive aspect. At least the Senior bond outperformed against the subordinated capital tranches as one would expect in such cases. As reader JM commented, the activity in the convertible prior to the announcement looks very very suspicious and smells of insider trading.

Updated liquidation analysis

First of all, let’s update the liquidation analysis from 2012:

Summary valuation of Assets

In the first step, I think it makes sense to use the same assumptions as last time, to make the numbers comparable. In the following table we see the asset “model” updated based on the 2012 report.

2011 Adj. Val 2012 Adj.Val Comment
Intangibles 251 0 253 0 100% write off
Inv. Property 3,964 3,398 3,654 2,920 scaled to 7% yield
PPE 157 118 190 143 25% discount
Financial Assets 189 142 174 131 25% discount
equity part 95 71 84 63 25% discount
DTA 404 0 336 0 100% write off
Receivables 60 45     25% discount
Inventory 1,025 513 996 498 50% discount
Receivables 179 134 190 143 25% discount
Cash 238 238 142 142 0% discount
AFS 341 256 58 44 25% discount
Asset Management 275   318 1.5% of AUM
Marekt value caverns 163   140 50% of disclosed adj.
Total 6,903 5,351   4,540

In second step we can then determine, how much assets are available for which debtor class. In the case of an insolvency, collateralized lenders get paid first, then senior lenders then hybrid and then equity.

Based on the 2012 numbers, i would calculate the following liquidation values:

Adjusted NAV   4540
-Bank loans   -3837
Remaining   703
Other senior liabilities    
  -Derivatives -84
  – Tax -77
  – pension -34
  – other financial -17
  – other liabilities -218
  – Convertible -400
  Total senior unsecured -830
  Coverage 84.70%

So this means that senior creditors would get under my assumptions still around 85% of nominal. This is slightly worse than last year but still quite positive and should limit the downside.

Of course, I did not consider additional costs of winding such a company up, on the other hand I didn’t put for instance a business value on the cavern business. However it is also clear that in a liquidation, both Hybrid and shareholders get a big fat “donut” as recovery.

What next ?

In such situations, it usually makes sense to listen to the analyst call in order to see what Management is actually saying. Fortunately, the call is easily accessible via their website. By the way: The used app for the audio file is really shitty…..

The most interesting section of the management comments is the fact that the 0.7 bn EUR 2013 maturity doesn’t seem to be a problem at all, as this is a 50% LTV loan.

From the Q&A, I found the following points most interesting:

– Squaire: Relative slow increase in occupancy. They need 90% occupancy to really exit which seems to need time, at least until 2014
– Caverns: Demand from utility side has shrinked, “NAV adjustment” at risk
– IFRS 13: There seem to be some issues in order to reflect transactional costs in the current valuations. They mentioned 100 mn EUR as potential (negative) impact.
– LTV target: They mentioned 55% as a goal, from around 71% today, with the intermediate step of 60-65% (my remark: with ~4 bn Bank, 5% LTV is 200 mn EUR.)
– no plan to sell fund management (would have been one option to generate equity)
– no mention of hedge funds as holders of the bank debt
– the “gherkin fund” has an indirect 44 mn EUR risk for IVG

In general, they were very vague about refinancing. They mentioned Rothshild being an advisor which is not the best news for existing investors. The whole call was with that respect a deja vue similar to the Praktiker call almost 2 years ago.

My expectation is the following:

Current equity holders will suffer one way or the other. My guess is that a new convertible will be part of any refinancing package. I could easily imagine somthing like pledging the fund business to a new investor, similar to the “Max Bahr” pledge at Praktiker.

In the process, they will come up with some “voluntary” contribution of Hybrid and Convertible holders which in my opinion will not work. I still belive that the Convertible will be paid in full in 2014, but the next few months can be very volatile.

Lessons learned:

I think I made one real mistake here: When I researched utilities earlier this year, especially Energiedienst, it should have been clear that the gas cavern business will not be so good going forward as in the past. As my thesis on the IVG bond implied a stable gas cavern business, I should have reviewed the case back then.

On the other hand it is interesting to see that a very broad research focus could yield quite interesting “cross results”.


I think there is no urgent need to sell as Convertible holder. The asset base is still high enough to support a relatively high worst case recovery for the senior unsecured creditors.

Nevertheless, one should prepare oneself for a quite bumpy rest of the year with some “Praktiker style” attempts t bail in bond holders. All in all I still expect full repayment in MArch 2014 with a high probability. However, because of the problems in the utility sector, the stabilizing effect of the cavern business has weakened significantly and the investment is riskier than before.

For the portfolio, I will hold the bonds for the time being.

DISCLAIMER: As always, DO YOUR OWN RESEARCH !!!! This is by no means an investment recommendation for anyone. Don’t trust anyone with tipps etc.

IVG Convertible – follow up & quick balance sheet analysis

After my post from Friday, I got a lot of comments.

One major argument is that the non-payment of the interest is a signal of weakness on IVG’s side and that this will negatively impact IVG’s ability to conduct business and get capital in the future. Here I strongly disaggree. First of all, after the 100 mn plus loss in 2011, everyone should know already that IVG is in a relatively weak or distressed position anyway.

Both, for shareholders which had to come up with additional money and didn’t get dividends for the last few years, as well as for senior holders, it would have been a really bad sign if IVG would have continued paying the hybrid coupon. It should be pretty clear that IVG might need more equity capital in the future as well as more senior funding,so it doesn’t make sense to offend those two groups. However it is extremely unrealistic that IVG is able to issue hybrid capital or another unsecured senior bond at any point in the near future.

So from my point of view this move has increased IVG’s credibility with equity holders and senior creditors.

Most of the commnets were right to the extent that my assumption of IVG not going bankrupt in the nect two years is maybe not an overly convincing investment case if one cannot quantify the downside scenario (bankruptcy).

So let’s look into the annual report 2011 to get a feeling about the potential liquidation value of IVG.

IVG’s business activities can be divided into 4 areas:

1. Own real estate
IVG owns a potfolio of around 3.8 bn of real estate. They show 227 mn net rent income which translates into a 6.0% yield on assets. The portfolio is 87% Germany based with a large share located in the booming Munich and Hamburg regions.

6.0% yield sounds like a relatively reasonable yield for German prime office real estate. Maybe 7% would be more conservative.

2. Real estate developement
This is of course the “problem child”, generating ALL the losses for IVG. Developement assets are booked under “inventory” and amount to 1.0 bn EUR. Here I would take a 50% haircut to reflect the risk of the largest developement project, the “Squaire” project in Frankfurt.

3. Oil & Gas caverns
This is the “crown jewel” of IVG. Few people know this, but IVG used to be a Government owned company (“Industrie Verwaltungsgesellschaft”) and was IPOed in 1993. The Oil and Gas Cavern business is a remainder of the old “Industrial Administration” business. Basically IVG has the license to develope and build underground storage caverns for oil and more important for natural gas in Germany.

As one can imagine, with the nuclear energy exit, natural gas storage is a big issue.

Without a 1.4 bn sale of caverns in 2008 into a special fund, IVG would have been most likely bankrupt by then. As a consequence of the sale, IVG now is obliged to sell most of the caverns which they currently develop into the fund. However as they manage the fund themselves, they are of course in a relatively good position to realize a fair price for them. Additionally they earn some nice management fees from the cavern fund.

Current book values of Caverns (at cost) are 770 mn EUR, IVG estimates the market value being 325 mn EUR higher. As a conservative approach I would only take 50% of the markup into my valuation.

4. Third party property fund management

They have two divisions: Insittutional fund management with ~12 bn EUR under management which generated 18 mn EUR EBIT in 2011 and a private investor fund management unit which genrated -5 mn EBIT having 3 bn under management.

In my opinion, IVG could profit from the closure of the open ended Real estate funds because they never participated in this market.

I would value the third part Asset management at between 1-2% of Assets under Management, giving a valuation of 150 -300 mn or 275 mn as mid point.

Summary valuation of Assets

2011 Adj. Val Comment
Intangibles 251 0 100% write off
Inv. Property 3,964 3,398 scaled to 7% yield
PPE 157 118 25% discount
Financial Assets 189 142 25% discount
equity part 95 71 25% discount
DTA 404 0 100% write off
Receivables 60 45 25% discount
Inventory 1,025 513 50% discount
Receivables 179 134 25% discount
Cash 238 238 0% discount
AFS 341 256 25% discount
Asset Management   275 1.5% of AUM
Marekt value caverns   162.5 50% of disclosed adj.
Total 6,903 5,351

In this table I have applied the discussed adjustments plus 100% “write offs” on intangibles and DTAs as well as a 25% write-off on anything else than cash.

Based on this we get around 5.4 bn EUR “Net Asset” Value which should be a proxy for a liquidation value.

If wee look at the liability side, we can see that we have a total of 5.5 bn Liabilities including the convertible bond, therof 4.9 bn financial liabilites and 0.6 bn other liabilites (excluding the hybrid).

Interestingly, “only” 2.8 bn of the loans are “secured” loans. For the sake of simplicity, I assume that all other financial liabilites are “pari passu” in a liquidation.

This leads us for the following estimation of a “unsecured” recovery:

mn EUR
NAV 5,351
-secured 2,764
NAV for unsecured 2,587
unsecured 2,736
coverage unsecured 94.6%

Under my assumptions, the downside case for unsecured senior is around 95%. Howver this also means that in the case of bancruptcy, not only equity holders but also Hybrid holders get wiped out completely.

One final word to “comparable” situations, especially Pfleiderer which gets mentioned often internet boards:

The main difference to Pfleiderer is in my opnion the structure of creditors. At Pfleiderer, the banks sold the loans at large discounts to Hedgefunds. For those HEdgefunds, which maybe bought at 40-60 cents on the EUR, a quick bankruptcy is the best case, because then tehy can take possesion of the underlying assets and realize close to nominal value.

For IVG this is not true. At least to my knowledge, the IVG loans are held by banks at nominal value, so taking possesion of the underlying assets would not yield a direct profit, but would increase the required capital to be held on a bank balance sheet, which the banks cannot afford.

To cut it short: As soon as Hedgefunds enter the secured loans at a discount one has to watch out, but in a “normal” situation, going concern is in the interest of all parties (Management, Secured creditors, shareholders etc.).

Summary: In my opinion, the IVG convertible represents “good value” if my assumptions are correct. However it should (as any distressed situation in general) viewed as a risky asset. You don’t get 15% p.a. (at 79%) for nothing.

For the portfolio, I think it is an intersting diversification play, because as long as banks struggle, they will support IVG.

P.S.: Just a a funny coincidence, IVG reported today that they rented out one of their Hamburg propoerties to no one other than PRAKTIKER !!!!!

IVG AG Convertible Bond (ISIN DE000A0LNA87) – Capital Structure considerations

The IVG Convertible bond is one of my “Special Situation” investments with a weight of ~2%. The bond is far out of the money, but has a bondholder call in 2014.

The bond has performed quite well, despite IVG showing a significant loss for 2011 at the end of March.

However, today the convertible bond got “hammered” because of the following news:

IVG has another bond outstanding, a subordinated bond. Yesterday IVG announced that following the loss (which they have already released and of March), they will not pay a coupon on the subordinated bond this year.

IVG Immobilien AG has resolved to suspend remuneration on the hybrid capital issued by the company (WKN: A0JQMH). The Board of Management bases its decision firstly on the discontinuation of dividend payments to the company’s shareholders since 2008 and the resulting equal treatment of the different equity investors. Secondly, the financial resources that consequently remain in the company can be used to further improve the capital structure.

The subordinated bond has a volume of 400 mn EUR (same as the convertible) and a coupon of 8%. This means IVG is saving 32 mn EUR by not paying the bond per annum.

Of course this is bad news for subordinated bond holders which seem to have expected further coupon payments:

What convertible bond holders seem to miss here is that this is actually positive news for all senior and secured creditors including the convertible bond holders.

Each EUR retained on the coupon from the subordinated bond increases the claim for the senior creditors and thus increases the intrinsic value of the senior creditors.

So instead of decreasing in value, the senior bond should have actually increased in value. At a price of 75%, the bond would theoretically yield 18.3% for the remaining two years.

For the portfolio I will increase the psoition up to a full position with a limit of 75% .

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