Adler IsĀ Another Fine Mess for German Capital Markets
(Bloomberg Opinion) -- Less than two years after the collapse of Wirecard AG revealed huge deficienciesĀ in German financial regulation, Europe's largest economy faces another fine corporate mess.
Top executives of listed German landlord Adler Group SA resigned over the weekend after auditor KPMG declined to approve its annual accounts, saying it had been denied access to necessary information. Adler's shares fell almost 30%Ā on Monday and some of Adler's bonds plunged to close to 50 cents on the euro, indicating substantial distress. Adler securitiesĀ recovered someĀ on Tuesday after the company provided assurances about its cash position. The companyĀ has almost 8 billion euros ($8.4 billion) of debt, soĀ there's a lot riding on how the situation is resolved.
Without a signoff from auditors, Adler will struggle to raise new money and it's facingĀ possible investor litigation. The Berlin-focused landlord was already under pressure after a separate KPMG forensic investigation of various allegations raised in October by short-seller Fraser Perring's Viceroy Research didn't fully exonerate the company and highlighted an array of governance failings.
QuicktakeThe Murky Adler Situation
Were German regulators once again asleep at the wheel, leavingĀ the hard work of identifying corporate shenanigansĀ to short-sellers and financial journalists? Perhaps, but in the wake of Wirecard, Germany has beefed up financial oversight. Regulators and auditors are now determined to show they aren't pushovers.
Adler is certainly feeling thatĀ pressure. Since last year, companies listed on Dax indices are obliged to promptly file audited annual accounts or face immediate ejection. So after postponing its results once already, the S-Dax listed group couldn't prevaricate any longer, audit opinion or none. (Adler also needed to publish audited accounts to comply with bond covenants.)
BaFin has alsoĀ gained new powers this year to probe corporate accounts after the dissolution of Germany's toothless financial reportingĀ watchdog, FREP. BaFin's investigation of Adler's financials is ongoing.Ā
Adler's chairman, Stefan Kirsten, a real estate veteran who joined in February, praised BaFin last month for asking āvery good questions,āĀ noting thatĀ German capital-market supervision had āsignificantly improvedā since Wirecard. His charm offensive is understandable, but theĀ new regulatory rigor won't help Adler swiftly move on from its compliance troubles.
Adler was taken aback by the severity of KPMG'sĀ auditing, saying over the weekend there was āa high level of distrustā between the company and its auditors. Yet critics have long urged the audit profession to actĀ more like bloodhounds than docile watchdogs, so perhaps the bean counters are finally showing appropriate skepticism. Audit firms who miss red-flags risk becoming the target of shareholder litigation themselves, soĀ it pays for them to be cautious.
KPMG's separate 125-page forensic review didn't find evidence Adler's property portfolio is systematically overvalued, yetĀ it revealed a litany of alarmingĀ governance and compliance deficiencies. Astonishingly,Ā Adler failed to hand over more than 800,000 documents. Its excuse of protecting attorney-client privilege feltĀ unsatisfactory.
Indeed, given so much information was held back, it was unwise of Adler toĀ playĀ down the seriousness of KPMG's findings, which had uncomfortable echoes of the way Wirecard's board handled a similar external probe.
Rival German landlord Vonovia SE was also too keen to move on. Instead of awaiting the findings of the KPMG probe, Vonovia provided a 250 million-euroĀ emergency loan to Adler anchor shareholder Aggregate Holdings in October. When Aggregate couldn't meet a margin call in February, Vonovia seized a 20.5% Adler stake as collateral. Those shares are now worth 160Ā million euros. Woops.
Adler hasĀ around 700 million euros of cash andĀ proceeds from asset sales, and other transactions should leave it with more than twice that by year-end, according to an investor slide deckĀ published Tuesday. So at least it shouldn't face an immediate cash crunch. A 1.1 billion-euroĀ impairment at its Consus development unit has putĀ Adler in breach of a bond covenant, but this too should be relatively easily remedied.Ā
The immediate priority is toĀ convince the auditors to sign off on the accounts, but earning back the trust of the capital markets won't be easy. Investors may be hoping an acquirer steps forward to enable a fresh start.
Adler's near 800Ā million-euroĀ market capitalization is a fraction of the book value ascribed to its property holdings, and thus a potentially tempting target. However, Vonovia hasĀ ruled out purchasing more shares and others may have similar reservations until BaFin has weighed in. Once again, all eyes are on Germany's financial regulators. Perhaps this timeĀ they'll have something to say.Ā
More From Writers at Bloomberg Opinion:
- Wirecard Has Shattered Confidence in Germany's Capital Markets: Chris Bryant
-
A $2 Billion Reminder to Doubt Your Audit Client: Chris Hughes
- Clear Up Yacht Ownership and Other Financial Secrets: Paul J. Davies
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Chris Bryant is a Bloomberg Opinion columnist covering industrial companies. He previously worked for the Financial Times.
Ā©2022 Bloomberg L.P.
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