German mega-landlord's deal faces lender pushback

London

GERMAN real estate company ADO Properties' plans to create one of the country's biggest residential landlords is facing resistance from lenders to its parent company who say the deal breaches bond terms.

Bondholders to ADO's Israel-based top shareholder ADO Group will demand repayment of about US$300 million of shekel-denominated debt if the firm presses ahead with its purchase of Adler Real Estate Group and a stake in Consus Real Estate.

This is according to a person familiar with the matter who asked not to be identified discussing private information.

The creditors have outlined their view that the deal contravenes conditions for the debt in a filing with the Tel Aviv stock exchange.

The proposed merger - first announced on Dec 15 last year - would create an 8.6 billion euro (S$13 billion) property empire by marrying ADO's Berlin-centred assets with Adler's presence across Germany.

The deal was announced shortly after Adler completed an acquisition of ADO Group and overhauled its board.

However, S&P Global Ratings said in December the deal would come at the cost of a weakened balance sheet, creating a highly leveraged entity that risked a downgrade to its credit score.

The shekel bonds have fallen 12 cents to 100 cents since the deal was disclosed, according to data compiled by Bloomberg.

Separately, at least one of ADO's shareholders, Canada's Timbercreek Investment Management, is also opposing the transaction and asked German regulators to block it, according to one of its Hamburg-based portfolio managers Claudia Reich Floyd.

"We think there's a big conflict of interest in this deal. ADO Properties did not consult with shareholders other than ADO Group for a transaction that clearly helps Adler's investors," said Ms Reich Floyd, adding the complaint to Germany's financial regulatory authority, Bafin, is backed by other stockholders without disclosing their identities.

"We are now stuck with a highly leveraged company that has a totally different mix of properties," she added.

Shares in ADO Properties, which counts BlackRock and The Vanguard Group among its biggest owners, have lost about a fifth of their value since the company announced the takeover.

Representatives for ADO Properties said there are "no grounds" to support the bondholders' demand for repayment. They also said the company is in "fruitful dialogue with Bafin", regarding the deal and that regulators have not raised concerns about its structure.

A spokeswoman for Bafin - also known as the Federal Financial Supervisory Authority - declined to comment in line with the regulator's policy to not confirm or deny specific complaints.

Last week, two board members of ADO's parent company resigned, citing a lack of transparency around the transaction in a Jan 30 letter published on the Tel Aviv stock exchange. REUTERS