Description

Company: Corestate Capital Holding SA

Stock ticker: CCAP GR

Bond Price: 25

Bond Target: 50

Timeline: 5 months

Situation: Distressed debt with a near term out of court exchange

Overview:

Corestate Capital Holding SA (CCAP) is a real estate developer and lender with co-investments in client projects. The convertible and senior unsecured bonds are currently trading in the mid-20s as restructuring plans are being drawn out in advance of the company’s November 2022 convertible bond maturity. Houlihan Lokey Inc is representing the bondholders, a group led by PIMCO who owns E118MM of the combined E500MM issuance.

Target price is 50, a double from current levels as the bonds are expected to be exchanged into a new longer dated bond with a stronger collateral package and potential for a small (6.4 points, or half of unrestricted cash) cash payment. The new package would create the company at 6.8x trough LTM EBITDA, 3.0x normalized E100MM EBITDA (guidance for 2022 before being pulled in March 2022) and 1.7x 2019 EBITDA of E175MM.

A conservative liquidation analysis supports this view with a recovery value of 40, however a liquidation is not expected.   All parties are highly motivated to avoid a liquidation or bankruptcy and we see an out of court exchange process as the best means to recapitalize CCAP GR.

Business:

Corestate is a listed real estate investment managers in Germany and selected European countries. The company has three subsidiaries:

1) Real Estate Equity (RE developer)

The Real Estate equity segment consists of sourcing and acquisition of relevant real estate opportunities and investments as well as day-to-day asset and property management and other related services.

2) Real Estate Debt (RE lender)

The company offers mezzanine financing and senior and subordinated loans for residential and commercial real estate developments in Germany, Austria, Switzerland and Spain.

Within this subsidiary, CCAP offers investment products via Corestate Bank and subsidiary HFS (Helvetic Financial Services). Corestate Bank GmbH was acquired for EUR 126.86M, transaction was announced on 01/14/2021 and completed in H1’2021. The investor base of HFS included approximately 70 institutional investors, such as pension funds, investment funds, insurers and pension schemes.

At December 31 2021, the total committed fund volume of € 1.2bn, covering about 45 financed projects with an average size of mezzanine financing between € 25m and € 30m.

Assets pending divestiture:

CRM  - Operator of student accommodation in the UK. Acquired for E17 in October 2018.

Capera  - Property manager for residential and commercial real estate in Germany. On 4/21/22 Soravia Group GmbH signed a share purchase agreement to acquire an unknown majority stake in Capera Immobilien Service Gmbh from CORESTATE Capital Holding S.A. for E14.5MM. This has been attributed to cash in the analysis.

3) Other (co-investments)

The other segment contains the company’s Alignment capital management activities, which are co-investments alongside clients. Alignment capital investments range between approximately 5% and 10% of the total equity.

Segment also contains real estate operations and assets held for warehousing purposes (assets acquired on CCAP’s balance sheet for a certain short-term period in order to convert them into investment products).

As at 31 December 2021, CCAP GR had invested € 145.9m

Segment earnings streams:

Financial Analysis

CCAP has been negatively impacted by covid, Ukraine and overall market weakness. Recent performance has been weak. Q1’22 revenues were disappointing and reflected lower transaction fees in real estate equity and debt, taking EBITDA to breakeven. The company has initiative a cost savings program and targets E10MM of savings starting in 2023.

 The company has been focused on transforming and focusing the business model on core real estate activities to by divesting its personnel-intensive and low-margin property management business, and its non-core asset management activities. Non-core businesses have a current AuM volume of €5.5 billion down from €8.5billion last year.

Liquidation Analysis

Key assets:

 ·         Cash

o   The company reported cash as of 3/31/22 of E70.0MM, restricted cash of E6.4MM was removed and E14.5 proceeds from the post-qtr end sale of Capera was included to give a total unrestricted cash amount of E78MM.

·         Giessen

o   Inner city shopping center in the heart of the university city of Giessen, second largest shopping mall in Mittelhessen. Corestate repositioned the neustädter with an excellent extension and conversion program since 2019.

o   Tenant structure: restaurants, kindergarten, grocery and food anchored shops, including around 60 retail stores, 33k sqm rental space with a current letting ratio of 82% and rental income of € 5.3m (targeted > € 6m).  

o   The company’s aim is to sell a large a part of its investment in Giessen after the completion of refurbishment in Q3 2022.

o   The company has €52MM of debt on its balance sheet related to the project and records its project equity value of €36MM.

o   Liquidation value assumes €52MM of debt is repaid and equity value of €36MM captured.

·         Corestate Bank GmbH

o   Corestate Capital acquired of Corestate Bank GmbH for EUR 126.86M. The transaction was announced on 01/14/2021 and was completed by 06/30/2021.

o   On 6/14/22, CCAP adjusted the goodwill of Corestate Bank by € 61 million.

o   Corestate Bank’s acquisition value was reduced by 50% for the liquidation analysis, in line with the recent goodwill impairment.

·         First Mico Living Apartments / Poland

o   Corestate Capital acquired First micro living apartments/Poland for EUR 73.00M. The transaction was completed on 02/03/2020.

o   The property contains the medical campus of Jagiellonian University, an apartment complex consisting of two buildings with 606 fully furnished apartments (689 beds) and total rental space of close to 12,000 m² is being built in Krakow. A new building for students with 475 units and 558 beds will be run under the Youniq brand.

o   The investment was done under December 2019 joint investment partnership with Bain Capital Credit in Poland.

·         CRM

o   In October 2018 CCAP acquired CRM Students Ltd. (CRM), the largest independent student accommodation management company in the UK, for approximately Euro 17 million. This asset is given a premium over its acquisition price.

·         Liver

o   The "most recognisable office building in the North of England" was put up for sale with a price tag of £90m, five years after it was sold for £48m (3/22). Full recovery is attributed to this asset.

Additional upside

The company has outstanding bridge loans on its balance sheet and have been expected to be reduced by E50-60MM in H1’22, but have not been repaid. The liquidation analysis suggests no value, even though this would boost recovery by 10-12 bond points, a significant value.

Additionally the company has mezzanine funds (i.e. Stratos), that management has stated turns over every 1 ½ years. With limited detail into this investment, no recovery was expected.

Potential Exchange Review

News reports indicate bonds holders are seeking an amend, extend, haircut and additional collateral. Below is a hypothetical exchange scenario where bondholders are exchanged at 50% of par, or at a 100% premium to the current bond price with half cash on hand paid as consideration (7.8 bond points or 31% of the current bond price). Legal costs are not factored in to the exchange but are into the liquidation analysis. Legal costs of 10MM would be 2 bond points, not impacting the below exchange recovery value.

New bonds are assumed to trade near par, given the pro-forma company’s low normalized leverage and additional collateral.

Current Cap Structure

Timeline

·         3/26/21

o   Annual report published.

o   Guidance for 2021 was confirmed and the company expected revenues between EUR 235m and EUR 260m, EBITDA of EUR 90-115m and adjusted net profit of EUR 50-75m.

·         3/08/2022

o   Corestate said it is planning to sell its UK student business CRM Students and German property management arm Capera.

o   https://www.costar.com/article/1060711850/corestate-puts-uk-student-accommodation-and-german-property-management-up-for-sale

·         4/21/22

o   Soravia Group GmbH signed a share purchase agreement to acquire an unknown majority stake in Capera Immobilien Service Gmbh from CORESTATE Capital Holding S.A. for €14.5 million.

·         05/06/2022

o   Bondholders to Corestate Capital Holding SA hired Houlihan Lokey Inc. as a restructuring adviser.

o   Group led by Pacific Investment Management Co. (owns E118MM of snr and convertible bonds) and including Fidelity.

o   Potential restructuring scenarios include extension of maturities, haircut and collateral added.

o   An agreed restructuring plan is expected by the November 2022 convertible maturity.

·         5/10/22

o   Withdrew guidance due to the recent macro events.

·         6/24/22

o   Press release that Corestate plans to drive transformation, makes impairments in the Real Estate Debt segment.

o   The company recognized impairments in bridge loans of Helvetic Financial Services (HFS) of € 392 million.

o   CCAP adjusted the goodwill of Corestate Bank by € 61 million.

·         6/28/2022

o   Annual General Meeting 2022

·         8/9/2022

o   Publication results for H1-2022

·         11/8/ 2022

o   Publication results for 9M-2022

Catalyst

Near term bond exchange