Category Archives: IVG Convertible

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:

  2012
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”.

Summery:

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% .

IVG capital increase

IVG is an interesting example for a “distressed” company, where the position as Senior bondholder is much more comfortable than being a shareholder.

After announcing relatively good Q3 numbers on which I commented earlier this month, they announced today the following:

The management board of IVG Immobilien AG, Bonn (ISIN DE0006205701) has, with the consent of the supervisory board, resolved to increase the registered share capital of the company from € 138,599,999 by € 69,283,885 by issuing 69,283,885 new ordinary bearer shares.

The new shares will be offered to existing shareholders by means of indirect subscription rights at a subscription ratio of 2:1, meaning that two existing shares will entitle a shareholder to subscribe for one new share. The subscription price is € 2.10.

A lot of people bought IVG shares because they trade well below book value, howver, issuing such a huge amount of new shares at an ever larger discount to book value is a clear dilution for existing shareholders. The result was a 15% drop in the shareprice.

For the 2014/2017 Convertible bond, this is in contrast good news which shows in a steadily increasing bond price:

From my point of view, there are a few take aways from this situation:

– looking at price to book ratios for distressed companies should always include the possibility of massive dilution
– especially when banks are involved who can use loan covenants as a tool the force capital increases, shareholders will normally suffer
– in such cases buying senior bonds at a large discount looks like a much better position compared to stocks
– stock or subordinated debt of distressed companies will only become intersting, once liabilites are reorganized in a way that no refunding is necessary for an extended amount of time (e.g. through long term bond issuance)

In my opnion, we will see more or less similar actions for Praktiker.

Gute Nachrichten bei IVG

Ausnahmsweise mal positive Nachrichten von IVG (nach unserer Erstanalyse hatte ich ja erst im August eine halbe Portion gekauft):

Zum einen hatte man schon gestern gemeldet, dass man 2 Mrd. Kredite erstmal verlängern konnte:

Die IVG Immobilien AG hat deutliche Fortschritte im Rahmen der Optimierung ihrer Finanzierungsstruktur erzielt. Zum einen hat die IVG Immobilien AG sich mit den Konsortialbanken des Syndicated Loan aus 2009 (der sogenannte „SynLoan II“) auf Basis einer rechtlich verbindlichen Vereinbarung über eine vorzeitige Verlängerung des im 4. Quartal 2012 auslaufenden syndizierten Kreditvertrags vorab verständigt. Die Prolongation dieser Konsortialfinanzierung unter Beteiligung von 12 inländischen Banken wird eine Laufzeit bis Ende des 3. Quartals 2014 haben. Sie umfasst ein Volumen von aktuell 1.047 Mio. Euro unter Fortführung einer Tilgungsstruktur auf Basis der Erlöse aus dem vertraglich fixierten Abverkauf von Kavernen an den IVG Kavernenfonds aus dem Kavernen-Portfolio der IVG. Die IVG rechnet mit anfänglich geringfügig steigenden, über den Zeitablauf jedoch sinkenden Kosten dieser Finanzierung.

Zum anderen hat sich die IVG Immobilien AG wiederum vorzeitig über eine Verlängerung der im 3. Quartal 2012 auslaufenden „CORE“ – Finanzierung in Höhe von 933 Mio. Euro mit den drei beteiligten Banken verständigt. Der Kredit wird bis Ende Dezember 2015 verlängert. Die IVG rechnet hier mit sinkenden Kosten dieser Finanzierung.

Das ist eigentlich nicht schlecht, wir erinnern uns: Die Wandelanleihe kann vom Anlegher per Ende März 2014 gekündigt werden.

Mit Hilfe von Marktwerterhöhungen scheint man anscheinend im 3. Quartal in die Gewinnzone gekommen zu sein.

Der Kurs der Wandelanleihe hat daraufhin heute auch schön reagiert:

Etwas ärgerlich ist allerdings die Tatsache, dass ich die Meldung mit der Verlängerung gestern schon gesehen hatte, aber nicht rechtzeitig reagieren konnte.

Fazit: Die Verlängerung der Kreditlinien über das Kündigungsdatum der Wandelanleihe hinaus ist definitv positiv zu sehen, auch wenn evtl. Covenants noch nicht bekannt sind. Mit aktuell 14,5% Rendite für eine Laufzeit von 2,5 Jahren ist die Anleihe aber nach wie vor attraktiv. Sollte der Kurs an “schlechten” Tagen nochmal Richtung 70 zurückkommen, wird auf eine volle Position aufgestockt.

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