Judge Thomas Leech has authorised the Adler Group to follow through on a restructuring plan that a determined group of bondholders say will leave them financially disadvantaged.
Lawyers representing Adler's English subsidiary were successful in arguing that the Geman real estate group was likely to enter insolvency proceedings at the end of the month unless its restructuring plan was approved.
Reflecting on the decision, Karl Clowry, a restructuring partner and expert at law firm Addleshaw Goddard, said: ‘The most significant issue here is the argument by 2029 bondholders that they would likely receive a better recovery/outcome in the relevant alternative of a group-wide liquidation than the value to be provided to them in the restructuring plan.’
‘This is the first time that a meaningful argument was placed on record by dissentient creditors in a restructuring plan on the issue of valuation and realisations likely to be achieved in a liquidation. It is one of the key points on which dissentient creditors in other restructuring plans may likely seek to challenge.’
Last week, closing arguments were heard in the legal case brought by the ad hoc group of bondholders.
The ad hoc group put forward one line of argument that they will be disadvantaged by being temporarily subordinated to others since they have a maturity date in 2029 and will fall to be paid last in line.
The ad hoc group’s lawyers said: ‘Given the terms of the proposed Plan Liquidation, the ad hoc group would in their view be better off with a Formal Liquidation in which their normal rights are respected, where they would rank equally alongside the other SUNs and where they are not subordinated in this way.’
‘They strongly believe that they would do much better in such a Formal Liquidation, something which is not surprising given the sheer extent of the subordination to which they would be subject under the Plan.’
‘They also strongly believe that the way in which it is proposed that different Plan Creditors are to be treated differently under the Plan is unfair and unjustified in circumstances where all those creditors would rank pari passu in the relevant alternative of the Formal Liquidation.’
Matters have reached court following a chaotic time for Adler.
As previously reported, the group got into grave difficulties linked to short seller Fraser Perring and amid allegations by Viceroy Research of wrongdoing by Adler. Viceroy has previously claimed Adler’s balance sheet had been artificially inflated to a significant degree, and its shares were un-investible – both allegations Adler denied.
Examining the High Court decision, Addleshaw Goddard’s Clowry noted: ‘Adler has been under significant liquidity stress for quite some time. It's interesting that the group chose the English court to lead on the restructuring plan rather where the company is headquartered in Germany.’
‘The reason for this was because the main bond issuer was an English company with English law bonds and it needed to complete a balance sheet restructuring before the German entity needed to file for insolvency at the end of April.’
‘The 2029s have indicated a willingness to seek to appeal the order. Without any relevant factual arguments (that is, on the respective valuations), or a legal principle, it remains to be seen whether an appeal will be permitted.’
‘What's interesting about this case is it's the first time a cross-class cram-downed creditor has indicated a willingness to formally appeal the outcome of an RP vote.’
‘An appeal or not, it is unlikely that the company can sweeten the offering to the 2029s so much so that they might be dissuaded from appealing. As to the merits of any appeal these will stem from the bases of their challenge to the valuations used in the RP and accepted by the court.’
The parent company, Adler Real Estate and fellow German real estate company, Consus, operate in Germany, and own or manage around 26,000 residential rental units and around 3,200 units in developments.
The yielding portfolio is primarily owned by the parent company and Adler Real Estate while the development portfolio is mainly held by Adler and Consus.
Adler also owns a 63% stake in German listed company, Brack Capital Properties, which is said to be held as an ‘asset for sale’. According to the lawyers, Adler tried and failed to sell the stake for €750 mln in Q2 2022.
Overall, Adler Group owns 616 properties in 36 German cities.
By September, the company had total liabilities of over €6 bn, of which €3.2 bn relate to super upside note holders.
Management plans a disposal of €2.8 bn of yielding assets and €1.7 n of development assets by Q4 2024, the proceeds of which are meant to pay off debtors.
A remaining €2.6 bn of assets and €400 mln of developments is forecast to be sold by Q4 2026. The company is expected to file for insolvency in due course.
Lawyers for the ad hoc group said allied to the planned asset disposals is what is called ‘an organisational scale down’.
‘This appears to be a euphemism for the fact that most employees will be made redundant. It is said that this will reduce full time employee costs from €51 mln for 681 employees at present to a target of €12.9 mln for about 150 employees by Q4 2024. This is a 78% reduction in personnel over the next 18 months or so.’
According to public records, Vonovia owns 20.49% of the parent company, Gerda Cancer 6.1% and Günther Walcher, founder and majority owner of Germany’s Aggregate Holdings 6.1% with the remaining 65.97% being in the hands of free float shareholders.
In 2022, KKR bought a €1 bn portfolio from the group. The previous year, LEG Immobilien acquired a €1.5 bn portfolio.
