Dusseldorf, Berlin The crisis at Adler Group SA reaches a climax this week. After several days of hearings, the London High Court will decide whether Adler can take on 940 million euros in new debt and be given more freedom to repay bonds worth 2.7 billion euros. There is only one relevant alternative, said a judge in advance: “This alternative is bankruptcy.”
A year and a half ago, a short seller with allegations of fraud and manipulation triggered the crisis at Adler. Adler denied the allegations, but has staggered from one low blow to the next since then. An investigation did not lead to full discharge, auditors refused the attestation for 2021 and resigned their mandate. Adler’s search for new examiners failed.
Financially, things weren’t going well either. Without a certificate, Adler cannot borrow fresh money on the capital market. Chairman of the board Kirsten wanted to sell apartments for one billion euros in 2022, which did not succeed. Instead, Adler had to negotiate the bailout with creditors. But a minority of creditors blocked the plan when voted on.
Adler’s last hope is English law. It allows the High Court to break the resistance. The coming week will be the final for the group.
1. Why judges in London decide on the bailout plan?
The Adler Group SA is registered in Luxembourg, the shares are listed in the S-Dax and the 26,000 apartments are in Germany. Why is a British court suddenly competent? The group needs the consent of the creditors for the intended interventions in the bond contracts. But a minority don’t want that. It blocked the first vote in Germany, in which one out of six bond tranches missed the 75 percent quota.
Adler made a new attempt. The group set up a subsidiary in Great Britain and used it as the principal debtor. Then the creditors had to vote a second time – with a similar result as before in Germany. Under UK law, the High Court can overrule oppositions by minority creditors. To do this, Adler must convince him that the rescue plan is better for the vast majority and the company.
2. Who are the opponents?
The rift between supporters and opponents of the rescue plan runs through the creditor community. Put simply, it looks like this: The shorter a creditor’s Adler bonds have a term, the more likely it is that he will support the restructuring plan. Adler therefore gets backing from international asset managers Blackrock, Schroders and Pimco, among others.
The opponents of the plan are also heavyweights. They hold larger shares in the 800 million euro bond, which is not due to be repaid until 2029. At its head are two investors who specialize in bad loans and companies.
>>Read also: How investors are fighting against Adler’s restructuring plans
The asset manager Strategic Value Partners (SVP) holds more than 13 percent of the 29 bonds, Carval Investors around eight percent. The British Attestor Ltd., known for its investment in the airline Condor, and DWS, Deutsche Bank’s asset manager, are also there. At the High Court, the four appear together as an “ad hoc group”.
Critics accuse them of having bought bonds at low prices during the crisis and of making good money even in the event of insolvency – at the expense of other creditors. A source close to the group dismisses the accusation as “propaganda”.
3. How do the opponents argue?
Investors around SVP say it is unfair to separate bondholders by maturity and treat them differently. Your concern: Many creditors will receive money back from Adler, only there will be nothing left for the longest-dated bond. In the event of bankruptcy, all creditors would be equal and more capital could be saved, they claim.
They also attack Adler’s methods. The group has therefore brought an action before the Frankfurt Regional Court. The investors there argue that Adler should never have transferred the bonds to the English subsidiary. It’s a secondary theater of war, because it’s the judges’ turn in London first.
4. What speaks for Adler’s restructuring concept?
The plan buys Adler time and money in the short term to keep going. The group should be healthily shrunk. The management hopes to be able to sell apartments and use the proceeds to service the debt. The problem: Potential buyers are trying to lower prices because they know that Adler is in dire need and that there is time pressure.
Adler would also gain more flexibility for the permitted debt ratios (loan-to-value) and the search for an auditor. Adler would not have to present an audited annual financial statement until the end of September 2024.
5. Will Adler go bankrupt if the court does not approve the restructuring plan?
Adler’s lawyers described the worst case scenario to the court: the restructuring plan was the last chance. At the end of April, two life-threatening dangers await. The subsidiary Adler Real Estate has to pay off half a billion euros in debt. “The group is facing a critical liquidity bottleneck,” Adler wrote to the court.
In addition, without an auditor, there are no “audited” financial statements for 2022, which Adler has to present at the end of April. Creditors could face billions in debt unless the review period is extended, as agreed in the bailout plan.
6. Whose money is it?
Big investment houses like Pimco, Schroders and Blackrock have lent money to Adler. But these often only manage the capital of others. A look at lists of their partners shows how the crisis could affect ordinary people around the world who have never heard of Adler.
In Italy, the Doctors and Dentists’ Social Security Fund has placed funds in the bonds, as has the UK’s plumbers’ pension fund and the US’s largest teachers’ pension fund. The Treasury of the Chilean government and BMW’s UK pension fund are also affected. This emerges from internal papers available to the Handelsblatt.
7. How important is the process for the real estate market?
Should Adler have to put its 26,000 apartments on the market at short notice, this could depress real estate prices. The market is already under pressure due to rising interest rates and other companies also want to sell apartments. Market leader Vonovia announced last August that it intends to sell residential portfolios worth EUR 13 billion.
8. Who is the judge?
The judge who matters now is Thomas Leech (59). The Londoner was a lawyer for more than 20 years, including as a partner at the law firm Herbert Smith Freehill. In 2019 he was appointed Deputy Judge of the High Court and two years later Full Judge.
Today’s King Charles III. knighted him in March 2022. Leech has comparatively little restructuring experience among judges in the Chancery Division, which deals with business law. As a lawyer, he worked in real estate and corporate law. As a lawyer, he focused on energy law, insurance and international arbitration. A favorite topic according to his biography: professional liability.
9. When is the verdict?
Leech could decide this week or take his time over Easter. He won’t be able to think long. Adler needs the cash injection in the middle of the month, otherwise it could come too late.
10. Is Adler really saved if the court enforces the restructuring?
Adler initially gains a year and a half, but the situation remains complicated. A substantial liberation can only succeed if Adler gets the apartments sold at a good price. In addition, after almost a year of searching, the management must now find a new auditor – ideally by the end of 2023. Otherwise it will be difficult to obtain an attestation by the end of September 2024.
At the same time, the group has to explain itself to the authorities. The financial supervisory authority Bafin has found gross accounting errors and is investigating two public prosecutors. Adler has so far denied any allegations and wants to go to court against the Bafin.
More: New anger about the Adler Group – the Berlin public prosecutor is investigating high-ranking managers.