The Bonn-based IVG Immobilien AG, until recently one of the heavyweights in the German listed property sector, is rapidly sliding down the ranks to join the market cap minnows as shareholders dump the company's stock in droves.
The company shocked investors yet again when it announced last week that it now needs to completely restructure its debt to find some solution to the refinancing of its colossal loan burden, most of which is maturing this year and next.
The company has outstanding debts of nearly €4 billion, most of which are bank loans. Of the debt, €3.16 billion of this needs to be refinanced by the end of 2014. Earlier in the month, IVG had reported an unexpected net loss of €99 million for 2012, and had already ruled out paying a dividend or servicing its obligations on a hybrid bond. That was bad, but there was worse to come.
When presenting the new doomsday scenario to the press in Frankfurt last week, CEO Dr. Wolfgang Schäfers was only able to say that the company was keeping all its strategic options open. All the stakeholders in the company would be required to contribute to any solution, he said. “We are already in a difficult market environment, confronted with new additional changes in regulations, energy policy and the economy. We will therefore adapt our entire financing strategy to the new challenges”, he said.
The annual shareholders meeting, scheduled for May 16, has been postponed until end of July at the earliest, to give the company time to explain any new strategy to investors.
The price of the IVG €400 million perpetual hybrid bond also tumbled in sympathy with the share price, and is now trading at a mere 28% of its face value – with investors now recognising that the bond has little chance of being redeemed for its nominal value by May 2013, when it falls due.
IVG's loans are now at just over 70% of the value of its assets, putting them within sight of the 75% level, which would trigger covenant breaches with the companies banks, but which the company had managed to avoid so far, said Schäfers.
The company's share price continued to slide during the week to just above €0.60, valuing IVG at about €140 million. In 2007, just before the financial crisis, the share price traded at about €35. Having acquired assets ravenously at the peak of the market, IDG found itself drowning in a sea of debt, and has been frantically restructuring ever since.
IDG manages real estate assets worth €21.1 billion, including the iconic Gherkin building in London, for which it is desperately seeking an investor. The Gherkin has failed to meet its rental expectations since it was build in 2006, and is also thought to have suffered major price depreciation. Part of the problem for IDG is that it financed the project with Swiss francs, which has strengthened against the pound sterling, effectively pushing borrowings on the building to 100%. This is well above the 67% effective LTV rate which could trigger breach of bank covenant clauses. The asset is held in one of IVG's funds, EuroSelect 14, in which IDG is a co-investor. Fund investors could face massive losses if the problem is not resolved swiftly.
As with the regime that preceded Dr. Schäfers and fellow board member Dr. Hans Volkert Volckens, the IVG board is likely to be completely engrossed in negotiations with banks to extend credit terms to keep the company alive, a task not likely to be made easier by changes in its operating environment. Changes in demand for energy storage and commodity production are likely to have a negative affect on the company's profit-generating underground caverns business, most of which it has since a bundled into its fund management operations. Weak demand in the office sector is also likely to impact on IVG's bottom line, given the company’s stable of prestigious (but for the tenant, expensive) trophy buildings.
Dr. Schäfers pointed to the operational profit generated by the company over the year, and the reduction of debt of €640m in the period, which he said would have resulted in almost break-even for the company, were it not for the extraordinary non-cash expenses and other project development write-downs.
REFIRE: We have been very wrong in our assessment of IVG’s prospects in the recent past, believing last year that the company had reached the bottom after resolving its massive cost overruns at the Squaire development in Frankfurt Airport – which nearly broke the company’s back - and could initiate recovery from there. This was an over-optimistic assessment.
IVG really is stuck between a rock and a hard place. While it has assets that are now generating profits, such as (finally) the ill-fated Squaire project at Frankfurt airport, and to some extent its exotic-sounding oil and gas underground caverns in northern Germany, it needs these assets if is to have any hope of servicing its mountain of debt. If it sold them to pay down debt, it will have little to generate cash to even begin negotiating with the banks.
Finding a buyer for a project as enormous as the Squaire in the current climate would not in any event be easy, nor is there any guarantee that the banks would be pacified by that, given the myriad other loans outstanding. As board member Dr Volkens said last week, “If all we are doing is plugging holes, then we can’t possibly achieve capital market viability, nor can we generate any prospect of dividend payouts.”
With a number of banks thought to be facing the inevitable and selling on the IVG loans to other specialists at a discount, the banks may start to refuse to play anything other than hardball with the once-mighty IVG. The extent of the haircut to be faced by all the IVG stakeholders may finally be the only question that matters.
