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Credit Research: Shenda Xu

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Issuers Financial Summary (Excel Download)
 
Valuation of European real estate properties has been under downward pressure due to the interest rate hike cycle initiated in 2022 by central banks to combat inflation. The clock is ticking for those real estate companies with an upcoming near-term maturity wall, which are buying time through slow-paced asset disposals, loan rollovers and negotiations with lenders, while pinning hopes on a market rebound once interest rates start going down.

The European Central Bank, or ECB, and Bank of England, or BoE, both signaled potential rate cuts later this year if inflation is heading toward targets. On May 8, Sweden’s central bank Riksbank announced a 0.25 percentage point cut for its policy rate to 3.75%, which is expected to be further cut two more times during the second half of the year, if the outlook for inflation still holds, it added.

However, it is unlikely rates will return anytime soon to the low levels seen between 2015 and 2021, and there could be a time lag before the rate cuts have positive effects on property valuations, meaning that we could see more casualties in the European real estate space in the near term, posing a risk for some domestic lenders exposed to the sector.

In this analysis, we’ll discuss the relative value for bond peers, real estate market dynamics, fair value adjustments of investment properties, as well as liquidity sufficiency across residential and commercial real estate names under our coverage.
 
Key Takeaways
 
  • Rising rate environments put downward pressure on property valuation and led to a drastic decline in transaction volume in the European real estate market. Germany, Sweden, Finland, Denmark and Austria are among the countries that experienced the largest decline in housing prices.
  • Real estate companies, especially commercial names, with relatively high LTV and low interest coverage ratio, or ICR, struggled to tackle near-term maturities and are compelled to sell assets to delever. This has also forced a few stressed landlords to restructure their near-term debt through maturity extensions or debt exchanges. For example, Branicks extended its £225 million promissory notes to June 30, 2025 from 2024 via a German StaRUG restructuring plan, while Adler Group and Demire are currently negotiating with bondholders to address near term debt (more details under Stressed/Distressed Real Estate Peers section).
  • Bond yields for real estate issuers are overall higher than other sectors, mainly attributable to the concerns over the whole sector. The yields of triple B rated senior unsecured notes are relatively high, ranging between 4% and 6%, above the average level for double B credits across industries of about 4%, according to Reorg’s calculation based on ICE BofA Euro High Yield Index. We note that among high-yield and crossover bonds, commercial real estate peers (for example, Citycon, CPI Property and Globalworth) have upward sloping yield curves while those for residential peers are inverted (for example, Heimstaden Bostad). This pattern largely reflects the worse environment with uncertain outlook for commercial properties versus residential. The demand for traditional office units has been significantly impacted by the remote and hybrid working trend, while the brick-and-mortar retail market has also been hit by the rise of online shopping post-Covid-19. The uncertainty of the future prospects for office and retail properties, together with their relatively high LTV and low ICR, amplifies their yields versus residential peers (more details under Relative Value section).
  • We calculate liquidity sufficiency through 2025 maturities for real estate peers (further discussions under Liquidity Sufficiency for Near-Term Maturities section). For residential peers, Grand City Properties has the best liquidity sufficiency while Peach Property, Accentro and Adler Group are among the worst. For commercial peers, Befimmo (a recent issuer) and Castellum have the best liquidity sufficiency, while Branicks, Canary Wharf, SBB and Demire are among the worst.
  • Potential interest rate cuts by European central banks could bring back transaction volume in the real estate market. A recovery for transaction volume in the second half of 2024 is widely expected by the markets.
  • Negative fair value adjustments on property book value lags behind the pace of rate hikes, and the magnitudes of value impairment differ across real estate peers. Companies that are slow to write down property values may see further devaluation in the coming quarters (more details comparing fair value adjustments among peers under Deep Dive Into European Real Estate Peers section).
 
Maturity Wall

The real estate companies covered in this report are facing about €8.7 billion debt due in 2024 and €18.5 billion debt maturing in 2025, a large portion of which is from Vonovia, Heimstaden Bostad, Balder, Aroundtown and Adler Group. A summary of maturity breakdown is below:
 

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Relative Value

Reorg’s coverage of European real estate companies also includes some investment grade issuers given that 1) they issue hybrid bonds that have been offering a high yield-to-call, or YTC, in recent years (more details under Hybrid Bonds section below); and 2) the yields of their SUNs are relatively high, ranging between 4% and 6%, above the average level for double B credits across industries of about 4%, according to Reorg’s calculation based on ICE BofA Euro High Yield Index.

Hybrid Bonds

It is common for German and Nordic real estate companies to have hybrid bonds, especially perpetuals, among their funding sources, as they provide them with flexibility in regard to interest payment (issuers can postpone interest at their option). The amounts for hybrid bonds are normally excluded from the reported LTV disclosed by the companies given that these instruments are typically treated as equity.

Hybrid bonds bear fixed rates in the first few years until coupon reset dates, after which the coupon will step up to higher floating rates, motivating companies to refinance or repay them before such dates.

In the past, investors were eyeing YTC upon coupon reset date, expecting to receive repayment at that point. However, this repayment trend has paused over in the past two years as real estate companies struggled to refinance amid rising rates and were in the mode of preserving liquidity, driving YTC higher.

For example, in Aroundtown’s first-quarter 2023 results, the company said it decided not to call the €600 million perpetual notes with first call date in January 2023. It also announced it wouldn’t redeem its $700 million perpetuals with first call date in July 2023 and €400 million perpetuals with first call date in January 2024. Similarly, Grand City Properties, or GCP, announced its decision not to redeem its €350 million perpetuals with first call date in October 2023. The step-up interest payment following the noncall decisions put pressure on the companies’ interest burden.

A YTC evolution chart for selected perpetual bonds is below:
 

Instead of fully repaying perpetuals on reset dates, companies may opt to launch exchange offers for such notes with optional partial repurchase in cash. For example, Aroundtown recently exchanged a large portion of its sterling and dollar-denominated perpetuals with an option for 20% redemption with cash, as well as euro-denominated perpetuals with an optional 15% cash redemption.

Investment Grade Peers
 

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Investment grade shorter-dated notes are trading closely to each other in the 4% to 5.4% yield range as demonstrated in the yield curve above, while the differences in yield are larger for longer-dated notes. The average yield across these peers is about 5%.

The yields on residential property groups’ notes, namely GCP and Vonovia, are the lowest, averaging 4.4%, below the yield range for high-yield territory. GCP’s yields are about 70 bps wider than Vonovia, reflecting its much smaller size (Vonovia’s net operating income is 8.4x larger) and that GCP has about €1.2 billion perpetual notes to tackle as mentioned above, which, if included, would bring adjusted net LTV to 51.9%, slightly above Vonovia.

Looking at Balder, a Nordic residential company, its €500 million 2025 SUNs’ 5.1% yield is close to GCP’s 2025 SUNs, reflecting market confidence in its ability to address the near-term maturities. The fact that Balder used bank financing to fund its €44.4 million tender for its hybrid notes, according to Bloomberg, suggests that the group could turn to bank debt again to tackle maturities.

The yield curve for Balder shows a steeper slope than other residential names, with longer-dated notes trading wider than GCP and Vonovia as shown in the chart above. In our view, this reflects 1) Balder’s much higher LTV at 58.6%; 2) lag in impairing property value compared with peers, which suggests a further devaluation in a larger scale in the following quarters (more discussion under Fair Value Adjustments section below); 3) its partly exposure to office and retail properties (16% and 10% of property value, respectively), which is more vulnerable than residential properties; and 4) lower ICR at 3x, versus 3.8x for Vonovia and 5.6x for GCP, which could deteriorate further as loans are rolled over with higher coupons.

In the commercial real estate space, the yield curve above shows that Castellum is trading much tighter than Aroundtown, with its €500 million 2% 2025 SUNs and €400 million 0.75% 2026 SUNs yielding at 4.8% and 4.5%, respectively, while the SUNs of Aroundtown trade wider with upward sloping yield curve.

In our view, Castellum’s financial profile is not solid enough to justify its narrower yield when compared to Aroundtown. Castellum’s adjusted net LTV is marginally lower at 44.3% compared to Aroundtown’s 44.9%. Considering perpetual bonds, Castellum also has a lower amount of hybrid securities, resulting in a lower LTV including perpetuals of 51.8% than Aroundtown’s 63.9%. However, Aroundtown has a much higher ICR at 4.2x than Castellum’s 3.2x, providing headroom to afford higher interest payments from hybrid bonds upon coupon reset dates, after which the company would either keep them in place, refinance them or exchange them for new notes, all of which could heighten coupons.

Crossover and HY Peers That Trade Wider
 

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Citycon, rated at Ba1/BBB- by Moody’s/S&P, represents an outlier in the chart above, with shorter-dated notes yielding at 4.8%, below the 7% to 8% range for other similarly rated peers. The lower yields could be due to its ability to tap the bond market with its EMTN program to issue a €300 million 6.5% SUNs due 2029, and tender €213.3 million of its €310.3 million 2.5% 2024 notes partly funded by the new notes. In addition, its 3.7x ICR, which is above peers, provides headroom to absorb higher coupons for potential future refinancings.

For the remaining peers, Heimstaden Bostad is the only name that has residential properties as its dominant asset. Its bonds’ yield range of 7% to 8% is much wider than residential peers Vonovia and GCP, reflecting its BBB- rating, which is two notches lower, relatively high LTV at 56.6% (or 63.9% including perpetuals), as well as lower ICR at 1.6x as of March 31, 2024, which is also below its own financial policy of above 1.8x. The ICR is expected to further fall to 1.3x in 2024, according to Fitch, before improving to about 2.4x in 2027, although management said on its first-quarter call that they expect its ICR to remain stable at about 1.6x going forward.

The current ICR level restricts its capacity to roll over loans with higher coupon rates, which would drag ICR even lower. Although the group said it aims to maintain its investment grade rating, with negative outlook from both S&P and Fitch, the risk of being downgraded to high yield is material without shareholder support. The delay and issues clouding a much anticipated equity raise from its major shareholder Alecta, a Swedish pension fund, are discussed HERE.

When looking at other commercial real estate credits, namely G City Europe, Globalworth and CPI Property, with upward sloping yield curve, their issues trade much wider than Heimstaden Bostad. This largely reflects the worse environment for office and retail properties versus residential. Indeed, the demand for traditional office units has been significantly impacted by the remote and hybrid working trend, while the brick-and-mortar retail market has also been hit by the rise of online shopping post-Covid-19. The uncertainty of the future prospects for office and retail properties, together with their high LTV and low ICR, amplifies their yields versus residential peers.

G City Europe’s €300 million 2.625% 2027 notes are yielding highest among peers at 9.6% as shown in the chart, aligning with its lowest rating of B2 by Moody’s. Although G City Europe has enough liquidity sources to cover its near-term debt obligations after the recent sale of a shopping center in Prague for a net proceed of about €147 million, we note that a major source of liquidity - €350 million unutilized related party credit facility - was granted by its parent G City. But as the parent company is itself now facing liquidity pressure, there is a growing risk that G City Europe may be a key source of funds to cover shorter-term liquidity needs at the parent level, resulting in weaker credit quality for the group, according to Moody’s.

Globalworth’s looming maturities were recently addressed via an exchange offer, which extended a majority of its maturity wall by four years. Out of its €450 million 3% 2025 notes and €400 million 2.95% 2026 notes, the group exchanged €380.8 million and €345.7 million to new 6.25% 2029 notes and new 6.25% 2030 notes, respectively. The remaining €54.3 million 2025 notes yield at about 8%.

CPI Property’s SUNs have recently been trading slightly tighter, yielding around mid-7%, after it recently priced a new €500 million 2029 SUNs issuance at 7%. The main concerns for the group center around its weakened credit metrics following the acquisitions of Immofinanz and S Immo, which were funded with €2.7 billion drawn bridge financing in 2022 (amount reduced to €608 million as of Dec. 31, 2023, following repayments), lifting its LTV to 57.5% and dragging its ICR to 2.5x as of Dec. 31, 2023. The €500 million new notes will be allocated to fully repay the remaining €530 million bridge financing balance as of Q1’24, although the maturity is in October 2026.

Recently, Belgium-headquartered office landlord Befimmo priced its debut €350 million 2029 notes at 10.5%. Befimmo’s asset quality is better than other peers, which provides predictable income supported by public sector tenants with long leases, high occupancy rate of 96%, as well as prime CBD locations. However, these credit positives are clouded by the lack of guarantee from real estate assets, though bondholders will benefit from additional support from a letter of credit or cash coverage account, which cover six months of interest payment for the whole term until maturity, and investors’ aversion to the sector weighs on. Reorg’s primary analysis on the issuance is HERE.

The remaining names are under stressed or distressed situations, which are discussed in the Stressed/Distressed Real Estate Peers section at the end of this sector report.
 
Rising Rate Environments Exert Pressure on European Real Estate Sector

The valuation and transaction volume in the European real estate market have been under pressure due to the interest rate hike cycle initiated in 2022 by the ECB and BoE to combat inflation.

In just over a year, the ECB’s deposit facility rate grew from 0% in July 2022 to 4% as of September 2023, and has remained in effect since. Similarly, the BoE started lifting its official bank rate in late 2021, escalating to 5.25% by Aug. 3, 2023 from 0.25% in December 2021. These hikes have lifted borrowing costs, leading to a cooling effect on the transactions within the real estate sector.

An evolution chart for key European benchmark rates is shown below:
 

In the last few years, European real estate companies have been enjoying cheap funding until the tides turned with interest rates soaring since early 2022. Current high levels of interest rates present three key problems for real estate companies: First, the valuations of real estate properties, which are sensitive to interest rate changes, have deteriorated in a rising rate environment; second, inactive transaction market makes it harder for companies to address near-term maturities and delever with asset disposals; and third, devaluation constraints ability to raise secured debt.

Valuation Faces Downward Pressure

House prices in the euro area experienced a fall for three consecutive quarters, with a 1.6% decline in the second quarter of 2023, 2.2% in the third quarter and 1.1% in the fourth quarter, according to Eurostat. Top decliners in the fourth quarter were Luxembourg (negative 14.4% year over year), Germany (negative 7.1%), Finland (negative 4.4%), France (negative 3.6%), Sweden (negative 2.9%) and Austria (negative 1.8%). House prices slumped deeply from the peak in the second and third quarters in 2022, with the euro area falling by 2.9%.
 

Such market dynamics affected the book value of residential properties for companies under our coverage, which recorded impairments to their portfolio book value of between 5% and 11% in 2023, as discussed further below in the European Residential Real Estate Peers section.

Similar trends could also be observed in commercial real estate, with the yield expansion indicating lower valuations for properties. The European composite yield stood at 4%, 4.6% and 4.6% for retail, logistics and office, respectively in 2023, up from 3.6%, 4.2% and 3.8%, respectively in 2022, according to BNP Paribas.

Looking ahead, as rates remain sticky at high levels, despite expectations of imminent rate cuts from the ECB, and property revaluation lag market pricing, there may still be room for properties’ book value to fall further in 2024. Henrik Braconier from Swedish financial supervisory authority (Finansinspektionen) commented that the full effect of rate hikes hasn’t been seen in the real estate market as all debt hasn’t been rolled over yet, according to Bloomberg, and some companies have been slow to write down property values.

European property value (excluding the U.K.) is estimated to further decline by 3% in 2024, which is a result of decline in commercial real estate (offices negative 5.7%, retail negative 4.4%, industrials negative 2.3%) and a slight improvement in residential properties with a growth of 0.4%, according to U.K .asset manager Abrdn. We note that residential is more resilient than commercial properties given that the supply-demand imbalance in residential properties translates into lower vacancy rates and rent growth.

Higher LTV caused by property devaluations, together with near-term refinancing needs, forces companies to sell assets to delever.

Challenging Asset Sales in Inactive Market Amid Macroeconomic Headwinds

The prevailing high interest rates sparked caution among investors, who have been waiting for rate cut signals from central banks since late last year. This has led to a drastic decline in transaction volume in the real estate market. Total investment volume in Europe for the fourth quarter of 2023 fell 43.6% to €44.9 billion from the peak of €79.6 billion in the first quarter of 2022.

The graphs below show the European investment volumes split by sector and by top seven countries.
 
 

Geographically, Germany and Sweden have witnessed the most severe drop in investment volumes, with reductions close to 80% from the peak in 2022. Most of the real estate names under our coverage are in Germany and the Nordic region, hence they are largely exposed to this sluggish transaction market.

Reorg restructuring and private credit forum will be held on June 12 at Sofitel, Frankfurt, discussing current trends and opportunities in the German distressed debt market, covering the fallout from the slowdown.

Regarding asset type, office and residential investment volumes have plummeted by about 70% since their peak in 2022 according to CBRE, which weighs on those companies that are reliant on property disposals for debt repayment such as Accentro and Peach Property for residential, as well as Demire, Branicks and Canary Wharf, which largely own office portfolios.

Other Options for Survival

As timely asset disposals often prove unfeasible, another way for the real estate companies to address near-term maturities is through secured debt financing; however, the ability of raising it has been weakened by deteriorating property valuation.

We observed that the real estate companies’ downward adjustments on their portfolio book value tend to lag behind the decrease in market prices. To make up for it, banks often impose haircuts of 20% or more on the book value when considering secured lending. Average valuations in Europe lag market pricing by around 8%, according to UK asset manager Abrdn.

Companies with looming maturities, poor assets, limited liquidity and without equity support would have no choice but restructure their debt through maturity extension or debt exchange.

For example, Adler Group is in advanced negotiations for another round of restructuring negotiations due to looming maturities, following its initial restructuring, which was sanctioned last year but faced legal challenges, resulting in the restructuring plan being set aside by the English Court of Appeal. Demire is negotiating with a group of bondholders of its €499 million 2024 notes for an extension to Dec. 31, 2027.

Branicks extended its €225 million promissory notes to June 30, 2025 from 2024 via a German StaRUG restructuring plan, and prolonged the €160 million bridge loan to Dec. 31, 2024. Vivion exchanged its 2024, 2025 notes and the 2025 convertible bonds for new 2028 and 2029 notes last year. Accentro completed a restructuring in 2023, which extended its 2023 and 2026 notes by three years to 2026 and 2029, with coupon lifted by 2 percentage points to 5.625% and 6.125%, respectively.

French real estate investment specialist Reside Etudes Investissement, whose hotel residences business was impacted by the pandemic, has accumulated a substantial debt pile and is expected to pursue either a distressed M&A strategy or a new money arrangement as several of the company's subsidiaries navigate safeguard proceedings, as reported. The potential new money may come from existing creditors or third-party investment funds, according to sources.

Positive Omens: The Pause of Rate Hikes, Potential Cuts in 2024, Volume Recovery

Positively, rates seem to have peaked in late-2023, underpinned by the decreasing trajectory in inflation prints recorded this year by BoE and ECB, and rate cuts are expected in the near term. At its April meeting, ECB signaled a potential rate cut in June if inflation is on track to its 2% target. Nevertheless, it is unlikely rates will return anytime soon to the low levels seen between 2015 and 2021.

For the EU, BNP Paribas said it expects a cumulative 125 bps of cuts this year, taking ECB’s deposit facility rate from 4% to 2.75% by the end of 2024 and 2.5% by the end of 2025. Similarly, an ECB survey of monetary analysts conducted in February, suggests an expected cut of deposit facility rate to 2.75%-3.25% by the end of 2024 and 2.25%-2.5% by the end of 2025, respectively, with the first rate cut of 25 bps in June.

For the U.K., a drop in interest rates by Aug. 1 is almost fully priced in by markets, according to Financial Times. Traders are betting the BoE will deliver at least two quarter point rate cuts by the end of the year.

On May 8, Sweden’s central bank Riksbank announced a 0.25 percentage points cut for its policy rate to 3.75%, citing that “inflation is approaching the target while economic activity is weak.” The policy rate is expected to be cut two more times during the second half of the year, if the outlook for inflation still holds, it added.

The potential interest rate cuts could bring back transaction volume in the real estate market, which is expected to bottom out in the first half of 2024 and show recovery in the second half. CBRE said it expects investment volumes to rise by about 10% compared with 2023, with activity picking up mostly in the second half of the year.
 
Deep Dive Into European Real Estate Peers

Fair Value Adjustments

Property valuations are falling across the board in the rising rate environment, but the timing of such devaluation varies depending on companies’ valuation cycle and accounting practices. Some companies impaired their property value across four quarters in 2023, while some others only made large impairments in the second or the fourth quarter of the year, as shown in the charts further below in this section.

Fair value losses recorded under companies’ financial statements since 2022 range from 2% to 22% for residential groups, and 6% to 22% for commercial real estate peers (except for G City Europe, which recorded a value gain of 0.3% since 2022). Charts showing value adjustments for investment properties are below:
 

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Some real estate companies still recorded devaluation in the first quarter of 2024 given the time lag between rate hikes and the full effect of value drop, but a trend of leveling off is expected going forward.

Additionally, companies that recorded a much lower level of devaluation than peers may experience a “catch-up” effect in its fair value losses in the next few quarters. For example, Accentro, which just marked a 0.3% value fall in 2022 and made no downward adjustment in the first three quarters of 2023, announced a €50 million to €60 million property devaluation for the whole of 2023, indicating a value drop of about 9.7% using the midpoint.

Liquidity Sufficiency for Near-Term Maturities

To evaluate liquidity sufficiency for the real estate names covered in this sector analysis, we calculate the maturity coverage ratios for maturities up to 2024 and 2025 by dividing each company’s liquidity by the amounts coming due in those two years. The analysis includes four scenarios:
 
  • Scenario 1 (most optimistic): Besides cash and unused facilities, companies are able to realize their guided disposal pipeline as liquidity sources. In addition, loan maturities can be rolled over leaving only bond maturities to be repaid.
  • Scenario 2: Companies can roll over loans with banks, but fail to dispose of assets as guided.
  • Scenario 3: Companies can still manage to dispose of assets as guided, but they can’t roll over loans with banks, therefore need to repay them upon maturities.
  • Scenario 4 (most conservative): Companies fail to achieve the expected asset sales and can’t roll over near-term loan maturities.
Summary charts showing liquidity coverage under the four scenarios are shown below:

The table columns are arranged according to the quality of liquidity coverage, with the highest quality on the left and the lowest on the right. For example, for residential real estate peers, Grand City Properties has the best liquidity sufficiency while Peach Property, Accentro and Adler Group are among the worst.
 

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Most of the residential names are able to cover their 2024 maturities under the most conservative scenario 4, other than Accentro, which would fall short of liquidity this year under scenario 4 because of its sizable portion of loans due 2024 compared with limited cash position. Commercial real estate companies see more operators facing liquidity shortfalls in 2024, including Branicks, Canary Wharf, SBB and Demire.

Occupancy Rate
 
 

Residential peers’ occupancy rates are above 96% besides Accentro and Peach Property. Accentro’s occupancy rate is the lowest at 73% for its investment properties due to its Central German portfolio in non-prime locations where the group expects vacancy reduction in the midterm. Peach Property’s occupancy rate of 91.6% is also relatively low driven by its renovation plan, and the group aims to achieve a normalized rate of above 96% in the midterm.

Commercial real estate peers’ occupancy rates are slightly lower than residential peers in general, and are above 91% besides Globalworth and Demire, whose occupancy rates are the lowest at 87.6% and 87.4%, respectively. The low occupancy rate for Globalworth is attributed to low occupancy rates in the Eastern European office market, while in the case of Demire it is mainly driven by the insolvency of its tenant Galeria Karstadt Kaufhof, which was part of the insolvent Signa Holding.

Peers Summary Table

A peers summary table for residential real estate companies is below:
 

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A peers summary table for commercial real estate companies is below:
 

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Stressed/Distressed Real Estate Peers
 

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German residential real estate company Accentro completed a restructuring last year, extending its 2023 and 2026 notes by three years to 2026 and 2029, with coupon lifted by 2 percentage points to 5.625% and 6.125%, respectively.

The 2026 and 2029 notes are trading at 50 and 32 and yielding at 57% and 41%, respectively, as the group carries the high LTV at 81.6%, and after it was forced in January to postpone the mandatory redemptions and referred interest payment due in February 2024 for its amended 2026 SSNs due to tight liquidity. The group also postponed the publication of its annual report, but it announced it expects devaluation of its properties of between €50 million and €60 million for 2023, which suggests that the LTV could climb to about 90%. Accentro said it will start another round of negotiations with its bondholder as such devaluation will lead to a “breach of the limitations on net debt” in the bond terms of its 2026 and 2029 notes.

German residential real estate Peach Property is another name that relies on further shareholder support given that its low ICR provides limited headroom for loan rollover, similar to Heimstaden Bostad. Peach Property’s ICR stood at 1.6x as of Dec. 31, 2023, above its policy of 1.5x.

Its €300 million 4.375% SUNs due November 2025 are rated at B3/BB- by Moody’s/Fitch, trading at 84 yielding 16.8%, according to Solve Advisors. The price traded up from about 83 in March after anchor shareholders provided a €17.7 million equity injection to strengthen liquidity, raising expectations that Peach Property may receive continued support from its largest shareholder Ares (which owns a 29.9% stake).

The current yielding level for its 2025 SUNs reflects the refinancing risk as the notes can’t afford the current rate levels in a straight refinancing, and therefore Peach Property would need further shareholder support and asset disposals, the amount of which has not been guided by the company. An amend-and-extend transaction is more likely, one source commented.

Holding company Heimstaden AB fully consolidates the aforementioned Heimstaden Bostad (opco), with 50.1% voting rights and 40.8% capital shares. Heimstaden AB’s core income stream mainly relies on dividends from Heimstaden Bostad, which has however suspended them since last year due to its own liquidity issues discussed above. Notes issued by Heimstaden AB are not guaranteed by any subsidiaries, including Heimstaden Bostad.

Heimstaden AB’s SUNs are rated much lower at B+ by Fitch, unlike its opco whose SUNs are rated at BBB- by both S&P and Fitch. Heimstaden AB’s €350 million 4.25% 2026 SUNs and €400 million 4.375% 2027 SUNs are yielding 38% and 26%, respectively.

On a standalone basis, we estimate Heimstaden AB’s liquidity to be about 1.8 billion Swedish kronor, including SEK 1.058 billion cash as of Dec. 31, 2023, and SEK 750 million expected proceeds from the sales of the Icelandic portfolio. This is barely enough to cover its 2024 and 2025 maturities at holding level, therefore the group needs additional liquidity to meet obligations from 2026 onward, particularly the 2026 and 2027 SUNs. The high yields of Heimstaden AB’s 2026 and 2027 SUNs reflect such liquidity coverage shortfall amid uncertainty of the ability of the opco to raise equity.

Canary Wharf Group, the U.K. office property owner, wrote down over £1 billion of its property value in 2023, indicating an about 14% fall in the valuation. The group is facing about £2 billion maturities for the next two years, and with only €329 million unrestricted cash it would rely on rolling over loans for survival, as a majority of its near-term maturities are secured loans and securitization. The group’s notes are yielding 10% to 11%.

Despite the looming maturity wall, Canary Wharf’s bond yields haven’t climbed much wider, in a sign that it might be able to tackle its short-term debt. The group announced it has entered into £553 million new financing, secured against its buildings, and management said it is reviewing options to extend or refinance a further £900 million of debt by the end of 2024. In addition, the group’s owners Brookfield and Qatar Investment Authority are expected to continue providing support. In October last year, the shareholders announced the injection of £300 million equity and a £100 million RCF commitment.

Vivion, which owns hotels and offices in the U.K. and Germany, went through a debt exchange last year, and as a result, it currently has €183 million 3% SUNs due August 2024, €608.6 million 6.5% SSNs due 2028 and €543.9 million 6.5% SSNs due 2029, yielding at 19.1%, 12.2% and 12.1% respectively. The group was the target of a short seller report by Muddy Waters in 2022, which mainly raised doubts over some of its shareholder loans and the potential inflation of the value of its U.K. hotel portfolio. Vivion addressed the short seller report with a detailed statement, which was well received by investors, though Muddy Waters has been challenging Vivion in 2023 with follow-up questions.

The group’s corporate structure is another concern for investors, given that a large portion of cash was held at its key subsidiary Golden Capital Partner, or GCP, which was only owned by Vivion with 51.5% stake while the remaining was held by other institutional co-investors. Of the total cash of €497.1 million as of Dec. 31, 2023, €430 million was at GCP level, leaving only €67.1 million at holding level. The ability for the group to upstream cash from GCP and risks of value leakage are discussed in Reorg’s analysis HERE.

Swedish real estate company SBB is also exploring a broad range of options to stay afloat amid looming maturities with strained liquidity. Main concerns for the company are: 1) ability to to realize proceeds from the disposal of a majority stake in its residential portfolio (through equity partnership or an IPO) in time before its liquidity runs out; 2) whether it will further postpone its dividend payment due this June; and 3) the legal battle with hedge fund Fir Tree Capital who holds about €46 million across SBB’s 2028 and 2029 notes regarding the alleged breach of ICR covenant. Reorg’s analysis on such alleged covenant breach is HERE. Reorg’s cash flow analysis is HERE.

German logistics and office real estate company Branicks recently extended its €225 million promissory notes due 2024 to June 30, 2025 via German StaRUG restructuring plan, and extended its €160 million 2024 VIB bridge loan to the end of 2024, which is just a short-term fix. Besides this year-end maturity, the group still needs to address the €133 million bank debt due 2024, with just about €111.5 million pro forma liquidity, leaving the group reliant on the sale of logistics assets from its 69%-owned VIB subsidiary. Branicks’ €400 million 1.875% 2026 bonds are quoted at 32, showing investors’ concern over the group’s ability to tackle near-term maturities.

Apollo-sponsored German office and retail landlord Demire has only one bond, €499 million SUNs due Oct. 15, 2024, and investors have been negotiating with the company amendments to the bond terms, including an extension to Dec. 31, 2027, mandatory prepayments from planned net sale proceeds and additional security. The ad hoc group currently holds well over 50% of the outstanding bonds. Sources told Reorg that a block of about €105 million bonds was up for auction, traded at about 60 and was bought by hedge funds. Demire’s notes are currently trading at 76.

German real estate company Adler Group is in advanced negotiations for another round of restructuring negotiations due to looming maturities, following its initial restructuring, which was sanctioned last year but faced legal challenges as the sanctioned plan was set aside by the English Court of Appeal. Reorg’s analysis on the overturned plan is HERE. It was downgraded by S&P to CCC- from CCC+ given the proposed debt restructuring, which S&P said it expects to take place over the next six months.

The price of €300 million 5.5% 2026 bonds of Signa Development, a German real estate developer owned by the insolvent Signa Holding, fell by over 25 points in early November 2023, on liquidity concern and the hiring of advisors. A month later, the group notified its event of default under its notes and subsequently filed for self-administration. Reorg’s summary of the key event timeline for Signa’s multijurisdictional insolvency is HERE.
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