Branicks - Chips - Positioning
All,
Please find our updated analysis here.
Branick’s SUNs will suffer some volatility over the next quarter as the company puts together an Amend and Extend package for the SUNs. Our core thesis is that this A&E gets done as it is in the interest of all the creditors. However, the availability of the StaRug stick still has some uncertainty, and this will lead to volatility. Branicks is taking significant charges on asset disposals, and completing the A&E is crucial to Branicks no longer being seen as a forced seller. After a successful investment, we are taking our chips off the table whilst we await the launch of the A&E process.
Investment Rationale:
- We are exiting our 5% long position in the 2026 SUNs; we have made a capital return of 95% in two years. We still believe that the asset covers debt, but there are uncertainties around the structure of the coming A&E, and there is more downside than upside in the short term.
- We estimate the current fair value of the SUNS at 80c/€, the drop is largely due to the institutional business now being at the VIB level (book value €360m, Sarria €252m). The value of this asset does not seem to be reflected in the value of the VIB equity.
- An A&E will need to be done for the SUNs; this will also need the Promissory Notes to be extended. However, there is no consensus as to whether a StaRug process can be used.
- We see 15 points of downside in the short term as investors look at the questions around creditor co-operation and the use of StaRug. We see 7 points of upside when an A&E agreement is reached.
- We expect the A&E to be agreed and will look to reset our long later.
- There is upside to our expectations, when Branicks extends the SUNs, it will have more time to await yields to drop, and VIB should start to see the value of the Institutional business in its equity price. We still see assets as covering debt, but liquidity concerns are going to constrain the bond valuation for now.
- Branicks is still being forced to sell assets at significant discounts to book value. This pressure will ease once the SUN maturity has been extended. value
- We view company-reported market values of the property assets, which are based on external appraisals, as being significantly above where the assets would likely trade at in the market: our base case valuation estimates of the standalone Branicks/VIB level assets are c.30% below reported MV, respectively. We see asset value as potentially covering debt, but with the €400m SUNs due in September 2026 needing to be rescheduled, we see pressure on valuations.
Key Conclusions:
- We expect Branicks to be able to execute its domination agreement, with most VIB minorities choosing the annual payment over the exchange.
- An A&E for the 2026 SUNs is necessary, and in our Valuation section, whilst we see a fair value of the bonds above 80c/€ even in our stressed scenario, we are taking our long off. The process has some potential challenges, and the legislation is new. We see volatility in the bonds in the near term.
- As our Trading section shows, asset sales were below expectations, and our Sales section highlights the gap between achieved prices and book values. The sales that are being made look to be more about what Branicks can get a bid for than a strategic realignment. As our industry section shows, the German Real Estate is flat at best in terms of valuations.
- Our Model shows Branicks being able to cover costs, but the SUNs and Promissory notes refinance will require an A&E operation, as they cannot be refinanced in the capital markets.
- Our liquidity analysis points to Branicks being able to offer a 10% cash payment in return for a higher coupon (PIK) to get a four-year extension of the SUNs. Cash is tight but manageable, assuming creditors remain rational and avoid an uncontrolled insolvency. We do not see the banks’ lending more cash, but rolling over 2026 maturities should be achievable. We would expect the ICR maintenance covenant to be removed in any rescheduling.
- The Intercompany loan from VIB was satisfied by the transfer of the Branicks Institutional Business to VIB. The book valuation is €421m, but we would expect this to be written down to closer to the €360m it was transferred for. VIB has a small institutional business of its own.
Recent Trading:
- At the Q3 presentation, management reiterated its FY guidance of €500m - €600m of asset sales from the commercial portfolio. This would have required €250m - €350m of 4Q sales, and in December, the FY figures were reduced to €450m; management expects a number of sales to be notarised in Q1 2026. There is still no public plan for the refinance of the Sep 2026 SUNs. Our expectation remains an A&E operation, which will be launched soon after the Domination Agreement is approved at the shareholder meetings of Branicks and VIB (12/13 February 2026). The details of the A&E will depend on asset sales and the level of cash at Branicks. We would expect the A&E proposal to be supported, as the alternative would be bad for all creditors.
The Domination Agreement will be approved:
- We expect the domination agreement to reach the 75% of votes cast for approval at VIB.
- The agreement requires >75% approval from the VIB Shareholders voting. Branicks will vote in favour with the 68% it holds; if Branicks can get the votes of 7% (of the 32% minorities), then the proposal will be approved. We see this as highly likely, given how minorities have failed to get any traction in getting a special auditor appointed to look at transactions between Branicks and VIB.
- Branick’s future is tied up with that of VIB, and it is unlikely that shareholders would cause a crisis by rejecting the agreement.
- The compensation offer is more attractive for investors, and we expect this will be the route taken.
- We are assuming that the domination agreement either already has (or does not require) assent from VIB's lending banks.
I look forward to discussing this with you all.
Regards,
Aengus
T: +44 203 744 7055