Branicks – Time to grasp the nettle
All,
Please find our updated analysis here.
Branicks has managed to move some of its LTV issues to ViB, but now it needs to find a method of pushing the maturity of the SUNs out far enough that it can further reduce LTV. Our analysis shows a path to repaying the debt and generating some equity value, but today, we see FV at 93c/€. We expect an A&E operation in Q3 25 when the SUNs go current, and we expect creditors to agree. We will update our view on how that A&E will be funded after the Q1 25 numbers are published on 8-May-25.
Investment Rationale:
- We currently have a 5% NAV Long position in the 2026 SUNs, trading at 63c/€.
- We see 30 points of upside to fair value and 15 points of downside if the company were to mismanage the A&E process. Ultimately, the A&E would get done, as creditors will want to avoid the possibility of a German insolvency process, as demonstrated by the buy-in from Promissory noteholders in the Q124 debt rescheduling. Our base case is an A&E operation backed by a StaRug process.
- To get investor support, any A&E will need to show a package nominally worth at least 90c/€ to avoid being classed as a distressed exchange.
- After various write-downs by Branicks, the company fair market portfolio valuation is broadly in line with ours. When we apply a 35% distressed sale discount, we estimate a 90c/€ recovery, assuming an orderly sale was conducted (rather than a liquidation).
- The SUN documents do not preclude Senior Secured or bank debt, which would prime the SUNs, but such issuance would be expensive and likely to trip the ICR maintenance covenant. Issuance of a new like for like SUN is precluded by the deep discount at which the existing bonds trade. Some form of 2nd Lien could form part of any A&E package.
Company book value is close to ours, but opportunistic offers are hampering sales:
- Over the year, Branicks sold €543m of assets to ViB and booked €71m in losses. We estimate that the Branicks portfolio disposals were around an 11% discount to book value. ViB booked €75m in gains on its purchases. We expect the two to be connected.
- At FY24, management took further write-downs on the book, and we now see our valuations as being in line with the company.
- Our bond valuations are lower as Branicks is viewed as an incentivised seller, and we expect that buyers will demand discounts. The discounts will remain until the overhang of the SUN maturity is dealt with.
Asset sales in 2025 have started slowly:
- To meet maturities, the Branicks portfolio needs to achieve €450m in sales (with €100m by the half-year). So far, nothing has closed, and we expect an update with the Q1 results.
- Branicks could make more asset sales to ViB, but minorities are already unhappy with the volume of transactions in 2024. Repeating the trick in 2025 will not be easy.
- ECB rate cuts will help valuations, but the Trump tariff turmoil isn’t helping.
- The ViB assets are better than the Branicks assets, last year was an attempt by Branicks to push some of its standalone LTV down at the expense of ViB.
- The Branicks Portfolio needs to be the main source of sales in 2025.
An Amend and Extend is needed.
- The SUNs will become current in September 2025. Branicks and its mortgage lenders will want to see the bonds extended.
- If we assume a new December 2030 2nd Lien note, 5% cash coupon (trading at 10%). Bondholders would also receive a 10% €40m cash redemption at par. The A&E package would be worth 90c/€. The equity would have to offer some instrument to offer creditors a route back to 100% recovery.
- Bondholders will be asked to cede upside to the equity holders. Branicks will eventually refinance as a smaller entity if the German real estate market recovers. There is a long way to go, but the pathway is credible to us.
- Creditors will want to ensure that proceeds of sales are used to pay down debt or redeem bonds, but need to avoid making Branicks a permanent forced seller.
- We intend to return to what the A&E will look like when the Q1 2025 results are published.
I look forward to discussing this with you all.
Aengus
T: +44 203 744 7055