Mon 04/11/2022 13:56 PM
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Corestate Covenant Analysis by Reorg's EMEA Covenants Team

Relevant Documents:
€200M Bond Prospectus
€300M Bond Prospectus
Corestate Financial Analysis

If German real estate manager Corestate chooses to use proceeds from an asset sale to solely redeem its 2022 bonds while the 2023 bonds remain outstanding, this may be restricted by the asset sale covenant of the 2023 bonds. However, the asset sale covenant is weakened by a €40.7 million de minimis threshold and exclusions for accounts receivable, inventory or other assets.

Even if Corestate’s cash conversion is not restricted by the asset sale covenant, the group’s directors could face criminal or civil liability if they fall foul of the German law insolvency regime. Redeeming the group’s 2022 bonds in full using asset proceeds prior to arranging a solution for the 2023 bonds maturity could cause the directors liability issues.

Corestate is facing a €500 million maturity wall in 2022-2023. The group said in its fourth quarter call that it planned to refinance the €300 million straight bond due April 2023 before summer and planned to redeem the €200 million convertible bond due November 2022 with cash on balance sheet (€62.8 million as of Dec 31, 2021) and cash from its cash conversion plan of about €180 million expected in the first half of 2022. The €180 million mainly includes over €90 million from sale of inventories and sale of other financial instruments and restricted cash, over €40 million from contract assets and trade receivables and €50 million to €60 million from repayment of bridge loans. Reorg’s financial analysis on Corestate is HERE.

In this article, Reorg looks at the asset sales covenant and its implications under the 2022 and 2023 bonds’ indentures. We also consider whether redeeming the 2022 bonds with proceeds from the cash conversion plan without finding a solution for the 2023 bonds could have implications for its directors under the German insolvency regime.
Key Takeaways

Asset Sales Covenant of the 2023 Bonds’ Indenture

  • Asset sales are permitted subject to conditions under the asset sales covenant in the indenture for the 2023 bonds (the “2023 asset sales covenant”) and there are no restrictions on asset sales under the indenture for the 2022 bonds.

  • Most of the assets identified in Corestate’s cash conversion plan apart from the Giessen project are valued at below the de minimis threshold (€40.7 million as of Dec. 31, 2021), under which assets are excluded from the 2023 asset sales covenant, if they are sold individually. However, as the assets are being sold as part of a cash conversion plan for the purpose of redeeming the 2022 bonds and refinancing the 2023 bonds, the asset sales may be considered to be a series of related transactions, and therefore would be considered in aggregate and not be excluded under the de minimis exception.

  • Giessen project had a book value of €70.4 million as of June 30, 2021, and management plans to sell between 51% and 90% of the project. If the fair market value of the project sale exceeds the de minimis threshold, proceeds may need to be applied in redeeming the 2022 bonds and 2023 bonds on a pro rata basis. However, the asset sale covenant is weakened by exclusions for accounts receivable, inventory or other assets and it may be argued that the Giessen project, which is recognized as inventory, falls within this exception.

  • If assets are sold that are subject to the 2023 asset sales covenant, the net cash proceeds may be applied in redemption of the 2022 bonds, but only if an offer is made to redeem the 2023 bonds pro rata.

Directors’ Liabilities

  • Although the Corestate bonds issuer is a Luxembourg company, it is listed on the Frankfurt stock exchange and the notes are governed by German law, meaning that the German insolvency regime could apply.

  • The German insolvency regime requires directors to apply a 12 month balance sheet solvency test. If Corestate chooses to repay the 2022 bonds after April 15, 2022 and the issuer’s ability to repay or refinance 2023 bonds on April 15, 2023 is not “predominantly likely”, this could be a breach of the regime.

  • If found to have breached the German insolvency regime, Corestate directors could be criminally and civilly liable.

  • Directors could take certain mitigation steps, including the appointment of advisors, however, securing a solution for the 2023 maturity before repayment of the 2022 bonds is likely to be the safest option.

Asset Sales

Corestate has announced its intention to dispose of certain assets as part of a cash conversion plan, as detailed below. We have summarized the relevant provisions of the indentures for the 2022 bonds and the 2023 bonds below, as described in the final offering memorandum for each bond.

Asset Sales Under the 2022 bonds

There are no restrictions on asset sales under the 2022 bonds and there is no requirement that the proceeds of asset sales be applied in redemption of the 2022 bonds.

Asset Sales Under the 2023 bonds

The 2023 asset sales covenant restricts the disposal or transfer of assets by members of the Group. Only those disposals that fall within the definition of “Asset Sale” are subject to the covenant.

De Minimis Exclusion

The definition of “Asset Sale” expressly excludes certain types of disposals, including a general de minimis carve out for “any individual disposal or series of related disposals” of the greater of €30 million and 2.5% of total assets (approximately €40.7 million, based on total assets of €1.628 billion as of Dec. 31, 2021). To the extent that the disposal proceeds of an individual asset are less than the de minimis amount (and do not form a part of a series of related disposals exceeding the threshold), they will be excluded from the asset sale covenant and may be applied at the discretion of the group, subject to compliance with other covenants.

The value of most of the assets identified in the cash conversion plan, individually, will be below this de minimis carve out. However, as the sale of the assets are part of the cash conversion plan for the purpose of redeeming the 2022 bonds and refinancing the 2023 bonds, it may considered to be part of a series of related transactions the aggregate value of which will be in excess of the de minimis carve out.

Exclusion of Inventory in the Ordinary Course of Business

There is an exclusion from the definition of “Asset Sale” for disposals of “accounts receivable, inventory or other assets (other than real property) in the ordinary course of business.” Corestate has identified certain propcos - High Street Giessen Propco Sàrl, Bego PropCo I, S.L. and Gabriela PropCo, S.L. - as part of its inventories. It may be argued that the disposal of these assets fall within this exception and, as such, is excluded from the asset disposal covenant. However, although “(other than real property)” appears to qualify “other assets” only, and not inventory, this interpretation would be strained; “(other than real property)” arguably also refers to accounts receivable and inventory. It would be incongruous and make little commercial sense if real estate was excluded from “other assets”, but not from accounts receivable and inventory. It is also questionable whether the disposals under the cash conversion plan would be in the “ordinary course of business”.

Exclusion of Investments in Joint Ventures

There is also an exception for the disposal of investments in joint ventures or similar entities, which may be relevant to the proposed disposals of joint ventures and associates identified in the cash conversion plan, although it is qualified by stating that it applies “only to the extent required by, or made pursuant to customary buy/sell arrangements between, the parties to such joint venture”. This would be unlikely to extend to the disposal of interests in joint ventures to third parties as its intention is to focus on the transfer of assets to the joint venture. However, interpreting the wording in its loosest sense, if the disposal of an investment in a joint venture is contemplated in the documentation pertaining to such joint venture, it may be excluded from the 2023 asset sales covenant.

Asset Sale Conditions in the 2023 Bonds’ Indenture

The 2023 asset sales covenant requires a disposal is made for fair market value and at least 75% of the consideration is cash or cash equivalents. The latter requirement is weakened by a carve out for consideration of the greater of €30 million and 2.5% of total assets in aggregate for all disposals. Given the intent is to use assets sale proceeds to redeem in cash the 2022 bonds, we presume Corestate will be ensuring it receives as much cash as possible in the sale[s].

Application of Asset Sale Proceeds Under the 2023 Bonds’ Indenture

For the period of 365 days after receiving the proceeds of an asset sale, Corestate is permitted to apply the net cash proceeds in accordance with the asset sales proceeds waterfall only.

Repayment of Debt Using Sale Proceeds

The categories of debt that may be repaid from asset sale proceeds are, among others:

  • Secured debt of the issuer.

  • Debt of any subsidiary.

  • The 2023 bonds, or

  • Other debt that ranks pari passu with the 2023 bonds on a pro rata basis with the 2023 bonds.

Any prepayment of the 2022 bonds from sale proceeds would require a pro rata prepayment of the 2023 bonds.

Investments Using Sale Proceeds

In addition to debt repayment, the proceeds may be applied under the waterfall to fund acquisitions, investments or capex. Some issuers who had cash reserved for capex, have applied the asset sale proceeds to fund the capex instead and the cash reserved for that purpose were available to be applied at the issuer’s discretion. Corestate has set aside €13 million for capex for the Giessen project as restricted cash, so this is unlikely to be sufficient to make a material impact on the redemption of the 2022 bonds.

If proceeds are not applied as described above within 365 days and they exceed €30 million, they must be offered in prepayment of the 2023 bonds and other pari passu debt. However, there is no requirement that they be applied pro rata between them. This formulation is unusual in that the period of 365 days for the application under the waterfall is mandatory and cannot be circumvented. Corestate is not permitted to make an asset sale offer with the excess proceeds until after the 365 days period has expired.

There is also a carve out from the definition of “Asset Sale” to the proceeds of asset sales that are used to fund Restricted Payments. “Restricted Payments” are defined as dividends or distributions, share buybacks and prepayments of subordinated debt. If the asset sale proceeds were distributed to a holding company or the investors and then reinvested, the contribution proceeds may be used for any permitted purposes, including the prepayment of 2022 bonds. Alternatively, if the 2022 bond holders were to agree to subordinate the 2022 bonds in right of payment to the 2023 bonds, the proceeds could be applied in prepayment. In the case of either a distribution or a prepayment of subordinated debt, such a payment would be subject to the restricted payments covenant in the 2023 bonds indenture. Capacity for such payments would be limited to the extent of the accrued capacity under the 50% CNI build up basket (€76.8 million of capacity as of Dec 31, 2021) and the unused amount of the general basket of greater of €30 million and 2.5% of total assets (€40.7 million of capacity as of Dec 31, 2021), an aggregate of approximately €117.6 million. As noted below, however, there may be directors’ liability issues with declaring a dividend and redeeming the 2022 bonds if a solution for 2023 bonds maturity is not found.

Unrestricted subsidiaries are not permitted under the 2023 bonds, so it would not be possible for Corestate to structure an asset transfer from the restricted group to an unrestricted subsidiary.

Refinancing of 2022 Bonds

The debt covenant of the 2023 bonds indenture permits the refinancing of certain permitted debt, including debt which was existing at issuance. This includes the 2022 bonds. Refinancing debt must have a later maturity than the 2023 bonds, a weighted average life to maturity greater than that of the refinanced debt, and if the debt is subordinated to the 2023 bonds, the refinancing debt must also be subordinated.

If refinancing debt is secured, it must be limited to the same assets that secured the refinanced debt. The 2022 bonds are unsecured. There is a general permitted security basket of debt of up to €10 million, but otherwise there are no other exceptions that would allow the group to incur secured debt which could be used to refinance the 2022 bonds.
Director Liabilities Under German Law

Corestate Capital Holding SA, as issuer of both the 2023 bonds and the 2022 bonds, is incorporated in Luxembourg. The bonds, however, are both governed by German Law. Further, the issuer’s shares are listed on the Frankfurt Stock Exchange. Given that the issuer’s primary listing venue is in Germany, it could be subject to the German corporate governance code (Deutscher Corporate Governance Kodex).

Further, there are obligations in Germany on directors, with respect to considerations that need to be taken when a company is in financial difficulty. These could apply to the issuer.

  • Directors have an obligation to continuously monitor developments which could affect the company’s existence and take appropriate action.

  • Where there is an insolvency or close-to-insolvency scenario - there are various duties imposed on directors which are designed to protect the interests of creditors. These include the obligation to file for insolvency in a timely manner.

  • Apart from the Covid-related changes made by the German government, which ended on April 30, 2021, there is a general obligation on directors to file for insolvency promptly and at the latest:

(i) within three weeks after the company is unable to pay its debts when due (other than in case of a temporary and minor liquidity shortage) (illiquidity); (Cashflow test) or

(ii) within six weeks after the company has become over-indebted, combined with a negative going concern prognosis (Balance Sheet test).

The Balance Sheet test provides that the debtor must be able to demonstrate that the group is “predominantly likely” to exist as a going concern for at least 12 months (this was four months under the Covid-related changes). If Corestate makes payments to some creditors, i.e. the 2022 bonds after April 15, 2022, but not the 2023 bonds, its directors must be satisfied that it can refinance, repay or find another solution for the 2023 bonds, due April 15, 2023.

Should Corestate repay the 2022 bonds and then be unable to repay or refinance or find another solution for the 2023 bonds at maturity, directors could be held civilly and criminally liable.

Where there is a failure by directors to file for insolvency in a timely manner, this could be a criminal offense for the director. Further, should an insolvency administrator later be appointed, the administrator may hold directors personally liable if the company suffers damage as a result of violating directors’ duties. There is a significant liability for directors arising from transactions at an undervalue or transactions detrimental to creditors.

If the German insolvency regime applies to Corestate’s directors, the directors could take certain practical steps to mitigate their liability. These include:

  • Acting upon resolution of shareholders, although this could prove impossible as the group’s shares are listed;

  • Obtaining D&O insurance;

  • Prepare liquidity forecasts to assess whether the group is balance sheet insolvent;

  • Consider the appointment of restructuring legal advisors and auditors to help conclude if the company does have an ongoing positive going concern prognosis.

Clearly, if the group is able to secure a refinancing of the 2023 bonds prior to redeeming the 2022 bonds, these director liability issues will fall away. However, this appears to be unlikely with the 2023 bonds trading at about 58.
Capital structure and Organization Chart

The group's capital structure is below:

Corestate Capital Holding SA


EBITDA Multiple

(EUR in Millions)





€54M Warehousing Debt 1


Other Debt 2


Total OpCo Debt



€200M Unsecured Convertible Notes due 2022 3




€300M Senior Unsecured Notes due 2023




Total Unsecured Bond Debt



Lease Liabilities


Total Other Debt



Total Debt



Less: Cash and Equivalents


Plus: Restricted Cash


Net Debt



Plus: Market Capitalization


Enterprise Value



Operating Metrics

LTM Revenue





Plus: Cash and Equivalents


Less: Restricted Cash


Total Liquidity


Credit Metrics

Gross Leverage


Net Leverage


EBITDA is the company's adjusted figure as reported. Restricted cash relates to capex loan at Giessen project. Market data as of April 4, 2022.
1. Related to Giessen project.
2. Partially related to capex loan for improvement measures performed at the Giessen project. Calculated as €133M bank & other debt less €54M warehousing debt.
3. The group bought back €6.5M in 2021. The bonds were placed with a coupon of 1.375% per annum, payable semi-annually in arrear and the conversion price was set to € 61.9580, representing a premium of 27.5% above the reference share price at the bond issue date.

The group's structure chart is below:

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