A charismatic entrepreneur pulls in wealthy investors to amass a portfolio of some of the finest prime real estate. Banks and bondholders are persuaded to provide the leverage. What could possibly go wrong?
Austrian property giant Signa Holding GmbH is proving that even top-quality assets can support only so much debt — and that rich shareholders have a limited appetite to keep throwing in money.
Signa is the creation of tycoon Rene Benko. He is no stranger to controversy. Benko was convicted in 2012 of making improper payments to officials and cleared earlier this year in a bribery case. A colorful past can put off banks and partners, mindful of the risk to their own reputations. But Benko got the support required to invest in assets including the Chrysler building in New York and Selfridges Group, owner of the eponymous London department store.
This €23 billion ($25 billion) empire is now in crisis. Signa Prime Selection AG, the subsidiary housing most of the assets, has asked investors to provide as much as €2 billion in funding in the coming months, Bloomberg News revealed Wednesday.
Benko has some extremely rich co-investors, including Hans-Peter Haselsteiner, the industrialist behind construction company Strabag SE, and billionaire Klaus-Michael Kuehne. They have had enough, pushing Benko to cede control earlier this month (he retains a majority stake). A restructuring expert has taken charge.
Signs of difficulty have been building for some time. The European Central Bank asked lenders to take provisions against their Signa exposure, Bloomberg News reported in August, although some officials thought this risked stigmatizing the company in the eye of lenders. For sure, the central bank’s move will not have helped Signa refinance its debts.
Amid this regulatory pressure, matters came to a head in recent weeks. A US-listed retail subsidiary filed for insolvency in October after the parent withdrew a funding agreement. Work on a high-profile construction project in Hamburg has been halted.
Another unit, Signa Development Selection AG, has warned of liquidity challenges. Its bonds, with a face value of around €300 million, have crashed to 30% of par. Signa’s partner in Selfridges took control of the company this week. Unfortunately that didn’t even bring in cash: A loan became equity.
“Prime is fine” is the property industry saying. But all leveraged assets feel the pain of rising borrowing costs. The expansion of yields in Germany — where much of Signa’s portfolio is based — has been dramatic. That exerts downward pressure on valuations and, in turn, inflates the key credit ratio of debt-to-assets.
When lenders see that owners have deep pockets, they may be tempted to assume they will automatically stump up fresh equity as needed. But that’s a dangerous assumption. Haselsteiner told the Tiroler Tageszeitung newspaper he hoped all shareholders would chip in, adding that Signa doesn’t have too much debt, only a liquidity issue. Yet some shareholders have reportedly exercised options to sell stakes in Signa Prime and Signa Holding.
Anyone putting in new money will want to see fresh, independent property valuations and have full visibility over liabilities. Management credibility is all, and Benko has himself acknowledged the need to restore trust. Existing owners must weigh the quantum of equity left to defend, and the extent their reputation either suffers — or gains — by walking away. Family offices may assess these differently than institutional funds focused on real estate.
Signa Development bondholders must now contend with the uncertainty over its position within a nexus that provides little public financial information. In a recent downgrade, credit assessor Fitch Ratings cautioned that the company may have increased indirect lending to other parts of the empire. Complexity, the lack of transparency being a private company, the level of related-party transactions and the supervisory board’s overlapping membership with that of Signa Prime amount to weak governance that undermined the credit rating.
The range of potential outcomes here is wide. Bondholders may push for immediate repayment, exacerbating the crisis. Mainstream real estate funds could well view the situation as too opaque to seek a stake in return for injecting cash. Perhaps a sovereign wealth fund will relish the opportunity to gain exposure to a unique portfolio by stepping in, rather than waiting to pick up any individual properties coming to market piecemeal or in a wholesale liquidation.
‘Prime is fine’ does rhyme, but that’s about it. The watchwords for real estate investors are prosaic — strong governance, high transparency and prudent leverage.
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