Adler Is Another Fine Mess for German Capital Markets
Adler Is Another Fine Mess for German Capital Markets
(Bloomberg Opinion) -- Less than two years after the collapse of Wirecard AG revealed huge deficiencies 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% on Monday and some of Adler’s bonds plunged to close to 50 cents on the euro, indicating substantial distress. Adler securities recovered some on Tuesday after the company provided assurances about its cash position. The company has almost 8 billion euros ($8.4 billion) of debt, so 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 facing 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.
Were German regulators once again asleep at the wheel, leaving the hard work of identifying corporate shenanigans 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 that 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 also gained new powers this year to probe corporate accounts after the dissolution of Germany’s toothless financial reporting watchdog, FREP. BaFin’s investigation of Adler’s financials is ongoing.
Adler’s chairman, Stefan Kirsten, a real estate veteran who joined in February, praised BaFin last month for asking “very good questions,” noting that German capital-market supervision had “significantly improved” since Wirecard. His charm offensive is understandable, but the new regulatory rigor won’t help Adler swiftly move on from its compliance troubles.
Adler was taken aback by the severity of KPMG’s auditing, saying over the weekend there was “a high level of distrust” between the company and its auditors. Yet critics have long urged the audit profession to act 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, so 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, yet it revealed a litany of alarming governance and compliance deficiencies. Astonishingly, Adler failed to hand over more than 800,000 documents. Its excuse of protecting attorney-client privilege felt unsatisfactory.
Indeed, given so much information was held back, it was unwise of Adler to play 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-euro 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 160 million euros. Woops.
Adler has around 700 million euros of cash and proceeds from asset sales, and other transactions should leave it with more than twice that by year-end, according to an investor slide deck published Tuesday. So at least it shouldn’t face an immediate cash crunch. A 1.1 billion-euro impairment at its Consus development unit has put Adler in breach of a bond covenant, but this too should be relatively easily remedied.
The immediate priority is to 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 800 million-euro market capitalization is a fraction of the book value ascribed to its property holdings, and thus a potentially tempting target. However, Vonovia has 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 time they’ll have something to say.
More From Writers at Bloomberg Opinion:
- Wirecard Has Shattered Confidence in Germany’s Capital Markets: Chris Bryant
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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.
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