Adler Group SA („AGR“; WKN: A14U78 ISIN: LU1250154413) and its subsidiaries – in particular Adler Real Estate AG („AGR“ ISIN: DE0005008007; WKN: 500800) – are forming a leading real estate group based in Luxemburg (AGR) „Adler Group“;) and Berlin (ARE). „Adler Group“ and all subsidiaries referred to as Adler for the purpose of this analysis.
Adler is experiencing a serious crisis for some time now. The group reported a loss in the billions in its consolidated annual report published on 30 April, 2022. The share price of Adler Group SA went down from almost EUR 50 in Summer 2018 to less than EUR 4 in Summer 2022. The bonds are also experiencing significant price decreases, in some cases to only around 42% of their nominal value and many are still trading at 50% or less of their nominal value.
Already in the fall of 2021, accusations had been raised that Adler has an excessively high debt ratio and is already in breach of Loan-to-Value (LtV) Covenants under some of their 14 outstanding bonds. In October 2021, Fraser Perring’s investment firm Viceroy has leveled allegations against Adler about questionable accounting practices, particularly in connection with the valuation of real estate and related-party transactions. One main question at hand was the valuation of real estate assets and their selling price to related parties.
Adler responded by selling various properties to institutional investors and commissioning KPMG to conduct a forensic audit of its own balance sheet to invalidate the allegations of accounting irregularities („KPMG Report“). But the KPMG Report failed to exonerate Adler, especially since KPMG’s forensics experts were not granted access to nearly a million internal emails.
On 30 March 2022 ARE has announced that it has signed a loan to its majority shareholder AGR with a volume of EUR 253m and conditions at arms length. But according to the financial statement for 2021 that money has already been transferred in December 2021.
On 29 April 2022 KPMG refuses to confirm the annual financial statements and issued a disclaimer of opinion on the financial statements of AGR and its subsidiaries (“Versagungsvermerk”). Most of the bonds issued by Adler Group have a covenant included stating that financial statements must be audited and published within 120 days after the end of the business year, thus by 30 April 2022 at the latest for the annual statements 2021. The annual report published on 30 April 2022 does not include an auditor’s opinion but only the disclaimer of opinion issued by KPMG. On 17 May 2022 Adler Group announced that KPMG will not be the auditor for the next financial year. So, Adler has no auditor’s opinion for 2021 and no auditor for 2022.
On 22 June 2022 European Central Bank has sold its Adler bonds. On the same day AGR has announced that the German supervisory organization (Bundesanstalt für Finanzdienstleistungen – „BaFin“) has initiated an investigation on the financial statement for 2021. One day later, on 23 June 2022, AGR has announced it has initiated a squeeze out process according to § 327a (1) 1 German Stock Corporation Act. That means AGR will take over the remaining outstanding shares of approx. 3,28% of the share capital of ARE.
On 24 June 2022 ARE purchased 1.400 apartments from its parent AGR for EUR 275m in cash.
On 29 June 2022 AGR held its annual shareholders meeting as a virtual meeting. It lasted about 20 minutes with short management statements only.
On 20 of July 2022 ARE has finally issued an invitation to its annual shareholders meeting to be held on 31 August 2022. Main point of this meeting is a requested authorization from the shareholders to sell almost all assets of ARE (22,301 out of 23,475 apartments).
On August 1 2022, during the course of its financial reporting enforcement examination, BaFin has determined that the consolidated financial statements of ARE as at 31 December 2019, contain errors. The real estate project “Glasmacherviertel” in Düsseldorf-Gerresheim was valued at EUR 375 million. This represents an overvaluation of between EUR 170 million and EUR 233 million. This announcement is a preliminary announcement of error findings by BaFin.
In the valuation of the Gerresheim site, ADLER Real Estate AG incorrectly recognised a property value that, as at 31 December 2019, was not representative of the price that could have been received for the sale as part of an orderly transaction between market participants. The reported values for the balance sheet items “Non-current assets held for sale” and “Income from fair value adjustments of investment properties” were therefore too high.
The overvaluation identified of at least EUR 170 million corresponds to the difference between the recognised value of EUR 375 million and the book value as at 30 June 2019 (EUR 205 million). Measured against the initial acquisition costs of EUR 142 million, the overvaluation corresponds to a maximum of EUR 233 million. The correct fair value (within the meaning of the International Financial Reporting Standards – IFRS) should have been calculated within this range.
Damages are in the billions already although the company still assures that all debt will be paid back. As regards the share prices for AGR and ARE alone, the figures are impressive. AGR had a share price of almost 50 EUR in August 2018 and it dropped to under 4 EUR in August 2022. Adler Group has issued 7 bonds with an outstanding nominal value of over EUR 3.3 bn. The AGR bonds currently trade between 38% and 59%. So, around EUR 5 bn in share value and EUR 1.7 bn in bond value have been lost to date on AGR level alone.
At ARE level shares were trading around EUR 15 in December 2018 and down to less than EUR 5 in May 2022. ARE is the issuer of three outstanding bonds with a total nominal value of EUR 1,1 bn. The bonds are now trading between 59% and 80%. Though damages sum up to around EUR 1,5 bn in share value and around EUR 300m in bond value lost.
Taking into consideration significant losses for investors in Accentro Real Estate AG (350m EUR in bonds outstanding) and Consus Real Estate AG (350m EUR in bonds outstanding), investors in Adler Group have already lost more than EUR 6bn in share value and more than EUR 2 bn in bond value.
These numbers are floating and may well increase as under German law the damage is calculated by the share price loss (Kursschaden).
The respective Adler entity is liable under German law for all damages that are caused with at least negligence (Fahrlässigkeit). However, in a possible insolvency scenario such claims are not worth too much. Besides the company there might also be claims against the management, which set cause to the damage with at least negligence. Such claims can arise from withholding relevant information from the auditors or from conducting agreements to terms that are not at arms length (nicht dem Drittvergleich standhalten). Also auditors for former issued opinions can be hold liable for damages, if such opinion should not be given. Third parties such as related parties or parties factually acting as if they were management might be liable under the concept of factual management (faktischer Geschäftsführer).
It is not yet known which next steps the management of AGR under the leadership of Prof. Kirsten is planning for the future of the group. But the recent announcements concerning the Squeeze Out indicate that AGR will soon delist its shares from the German stock exchange. The main reason for this is to reduce transparency obligations and to avoid minority shareholder rights under German law.
We believe AGR will not stop at the delisting but intends to modify the debt structure of the Group. If AGR was to merge ARE upstream into AGR after the squeeze out, this would mean severe changes to the debt structure. ARE bondholders are now very likely in the money considering assets with a (book) worth of EUR 5 bn and bonds debt of approx. EUR 1.1m. But after an upstream merger ARE bondholders would rank pari passu with AGR bondholders and would need to share all ARE assets with AGR bondholders. Such action would thus weaken the position of ARE bondholders to the advantage of AGR bondholders who are now far away from the assets.
The bonds terms and conditions differ from bond to bond. But the main terms in almost all bonds include covenants relating to the Loan-to-Value („LTV“) which gives bondholders the possibility to accelerate the bonds if the defined LTV is violated. Such is not unlikely considering the KPMG report and its reference to certain transactions which could have been concluded with the purpose to circumvene the LTV covenants. Especially after the BaFin findings announced on 1 August 2022 the LtV can be considered breached as the Gerresheim transaction was overpriced to deceive the public and bondholders of a LtV covenant breach under the bonds terms and conditions. The legal question was raised and is currently under review wether this potential covenant breach can be healed. Such healing possibility is part of the bonds terms and conditions but relying on it in case of an intention circumvention is doubtful. Because in § 162 para 1 German Civil Code (Bürgerliches Gesetzbuch) the following principle is stated: “If the satisfaction of a condition is prevented in bad faith by the party to whose disadvantage it would be, the condition is deemed to have been satisfied.” So if Adler has prevented the bondholders to exercise their rights under the bond terms by overpricing the Gerresheim transaction in bad faith and thus deceive their own breach of the LtV covenant under the bonds, Adler can likely not rely on a possible healing clause by saying no one called the covenant breach. In addition, such behavior leads very likely to liability under German capital markets law because of violation of ad hoc obligations.
In addition to the LtV covenants, the AGR bonds covenants have also the obligation to issue an audited financial statement for a financial year within 120 days of the following year. AGR has issued their financial statements on 30 April 2022 only with said disclaimer of opinion by KPMG Luxembourg. The question therefore is whether a financial statement with an disclaimer of opinion can be considered an ”audited“ financial statement. In our opinion this is neither the case under IFRS nor under the relevant bond prospectus considering German law. If in doubt under German law – as general terms and conditions – a specific clause must be interpreted favorable to the third party and not the issuer of the clause.
So, there are in fact very good arguments that Adler Group is already in breach of its covenants under the bonds prospectus.
Investors have a wide range of options. Regarding their losses investors may review potential claims against Adler entities, their management or third parties involved such as auditors or persons being regarded as factual managers (faktischer Geschäftsführer).
With regard to their investment in bonds and shares, investors should organize and push for an independent management and/or oversight over AGR and ARE. In our opinion Mr Kirsten has proved himself unable or unwilling to objectively investigate and take necessary actions to protect the investors rights. Investors like bondholders and (independent) shareholders should act and protect their investment. This apparently can not be achieved with current management and the majority shareholder.
This can be achieved for shareholders by fighting the squeeze out and organizing and voting on the appointment of a special investigator (Sonderprüfer) according to § 142 of the German Stock Corporation Act (Aktiengesetz) and a of a special representative (besonderer Vertreter) according to § 147 German Stock Corporation Act. Only a truly independent review and investigation can reestablish the trust of the capital markets and the public. Also, questionable incidents, sales and purchases and other dubious transactions should be reviewed and promising claims should be pursued. Such formal remedies could also help to stop or delay the squeeze out until the severe allegations were reviewed and trust reestablished.
The company claims that there are enough assets to pay all debt. That is doubted by some market players as the environment for large transactions in the real estate sectors is not to favorable at this time. Furthermore, higher coupons on loans and capital market instruments as well as in project financing are threatening the business model of real estate developers. If AGR can not find an auditor for its annual financial statements for 2022 there will be no fresh money and no going concern. In such a scenario, anything is possible.
We believe that by end of 2022 or beginning 2023 the latest, AGR is likely to start a bond restructuring considering the imminent maturity of some of their bonds. If an upstream merger was successful, such restructuring could be done in Luxembourg or under an UK scheme of arrangement. Also, a restructuring under the German Act on the Stabilisation and Restructuring Framework for Businesses (StaRUG) as well as under the German Bond Act (SchVG) are possible. We believe the banks who are close to the assets and with market standard covenants and securities are already in negotiations with Adler. Bondholders need to claim a seat at the table and be included in the ongoing negotiations. This can be achieved by ad hoc committees, a common representative for each bond (gemeinsamer Vertreter) or the legal advisors coordinated by a group of bondholders.
AGR is advised by law firm White & Case. Different groups of bondholders are advised by German law firm Hengeler Mueller, US law firm Kirkland & Ellis and German law firm DMR Legal. UK firm Allen & Overy is said to advice the banks. German lobby group for shareholders Schutzgemeinschaft der Kapitalanleger is representing a group of shareholders likely to push for a special audit of Adler Real Estate at the unit’s annual meeting on 31 August 2022.
We recommend organization on all levels. The story of Adler that all will be repaid is not credible anymore. A company of this size that has no auditor’s opinion is effectively cut off from any fresh money. Maturity of the bonds is coming and dubious transactions within Adler with the obvious goal to transfer cash from cash cow ARE to holding AGR arise a lot of suspicion. The lack of transparency by Adler is scary and investors just waiting for what is to come might be risking an (almost) total loss of their investments. That means that equity is out of the money already. Adler is economically owned by its debtors, and they should step up and become active.
DMR Legal is talking to many bondholders (ARE as well as AGR) and with shareholders and their advisors. We are happy to share deeper thoughts and analysis on the details of the problems touched on briefly above.