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German property group Adler’s restructuring suffered a setback on Tuesday after a London court overruled an earlier decision that gave the green light to a plan designed to stave off insolvency.
The Court of Appeal said that a lower court in April “erred in principle” by approving a debt restructuring that extended some of Adler’s bond maturities and allowed it to borrow another €938mn.
The ruling is a victory for a group of bondholders who brought the appeal and opposed the restructuring, which they said unfairly favoured some creditors over others.
A decade of aggressive expansion turned Adler into one of Germany’s largest landlords with a portfolio at one point of 70,000 apartments. But Adler has been fighting for survival since late 2021 when short seller Viceroy Research accused the company of inflating its balance sheet and conducting undisclosed related party transactions.
Adler hired KPMG to conduct a forensic investigation into the allegations. The investigation by the Big Four firm did not uncover evidence of fraud but found widespread governance and compliance shortcomings.
As part of the contentious restructuring, Adler suspended interest payments on €3.2bn of outstanding bonds and raised fresh funds from existing bondholders.
It spared Adler from collapse as much of the new cash was used to repay bonds that were maturing in 2023 and this year, buying the company time to sell down assets in an orderly way.
However, owners of the longest-dated bonds, maturing in 2029, launched an appeal in London, claiming they were put at a disadvantage versus other bondholders. Including bank debt, the group has €6.5bn of financial liabilities.
Despite the ruling, Adler said it would “continue its restructuring path as planned”. The company added in a statement that German law applied to the restructuring and “the terms and conditions of the bonds remain valid regardless of the decision”.
A representative for the bondholders who challenged the restructuring said: “We are pleased with the decision, which confirms that the restructuring plan is ineffective, and we now look forward to engaging with the company and other stakeholders in light of this judgment.”
The Court of Appeal’s decision could set a precedent for European companies seeking to carry out debt restructurings through London’s courts, potentially limiting their ability to drive through deals that benefit one group of creditors over another.
The judgment was “hugely important” and restructuring experts would be “poring over” it, said Kate Stephenson, partner in European restructuring at law firm Kirkland & Ellis.
In 2022, Germany’s financial watchdog BaFin concluded that in 2019 Adler had inflated its balance sheet by €3.9bn and its earnings by €543mn. In December, BaFin said that it uncovered additional accounting mistakes in Adler’s 2020 and 2021 results.
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