The latest information on the rating, including rating reports and related methodologies, is available on this LINK.

Rating action

Scope Ratings GmbH (Scope) has today downgraded the corporate issuer rating on German real estate company Adler Real Estate AG to BB- from BB and its senior unsecured debt rating to BB from BB+. The Outlook has been revised to Negative. The Ratings and Outlook have also been withdrawn for commercial reasons, as future capital market debt issuance will take place at the Adler Group S.A. level and there is no longer a need for a rating on Adler Real Estate AG.

Rating rationale

The rating action follows changes to Adler Group’s business profile and limitations on its refinancing options in view of recent debt and equity market turbulence affecting the company. The publication of a critical research report by investigative financial research firm and short-seller Viceroy Research has prompted stark market reactions and will in Scope’s opinion, at a minimum, be a major distraction to management and complicate near-term capital-raising efforts. The Federal Financial Supervisory Authority, BaFin, also intends to examine the issues raised in the report, incl. aggressive asset valuations and related-party transactions that have disadvantaged the group, its minority shareholders and creditors.

Adler Group has simultaneously initiated a review of strategic options for its residential yielding portfolio. The review has already resulted in the signing of a term sheet to sell 15,500 units, over 20% of the group’s roughly 70,000 residential units, to LEG Immobilien SE for EUR 1.5bn. The transaction is subject to signing of a final agreement and regulatory approvals and expected to close by the end of 2021. The proceeds are earmarked for debt reduction.

While the issues raised in the report are still unproven, and disputed by Adler, negative effects on credit metrics or liquidity cannot be ruled out. Scope believes the event will make it more difficult and costly for the group to refinance its debt and has revised downward its medium-term forecast for the Scope-adjusted EBITDA interest cover ratio for the group to below 1.5x, from more than 1.5x previously. Adler Group had EUR 370m of cash, a EUR 300m unutilised revolving credit facility and about EUR 1bn of short-term debt as at June 2021. The announced asset sale will cover the short-term debt maturities. Scope expects Adler Real Estate to continue to finance debt maturities through intragroup loans from Adler Group, as was the case during H1 2021.

The Negative Outlook reflects the potential risks of covenant breaches and debt acceleration should the BaFin examination trigger any changes to the company’s asset valuations or accounting practices. However, Scope’s base case assumption is that the group can avoid a covenant breach through asset sales and debt reduction.

Adler Real Estate continues to benefit from a strong business risk profile, based on its large-scale, well-diversified property portfolio by both geographies and tenants, bolstered by the integration with the even larger Adler Group. The ratings are constrained by Adler Group’s slightly higher leverage and weaker debt service cover than at Adler Real Estate.

Adler Group acquired Adler Real Estate in April 2020 and held 97% of its shares as at June 2021. Scope believes Adler Group’s willingness to support Adler Real Estate is high, given the anticipated execution of a domination agreement in the near term, the consolidation of operations, the integration of financial and asset management operations and a shared name. Scope expects the two companies to be fully integrated once the domination agreement has been executed and sees the credit profiles of the two companies as closely linked. Future capital market debt issuance will take place at the Adler Group S.A. level, and there is therefore no longer a need for a rating on Adler Real Estate AG.

Ratings have been withdrawn for commercial reasons.

Long-term and short-term debt ratings

The debt ratings are also lowered by one notch for the same reason as the downgrade of the issuer credit rating. Scope rates senior unsecured debt one notch above the issuer credit rating to indicate its expectation of above average recovery rate for senior unsecured creditors of Adler Real Estate. 

Stress testing & cash flow analysis
No stress testing was performed. Scope Ratings performed its standard cash flow forecasting for the company.

Methodology
The methodologies used for these Credit Ratings and Outlooks (European Real Estate Corporates, 15 January 2021; Corporate Rating Methodology, 6 July 2021), are available on https://www.scoperatings.com/#!methodology/list.
Scope Ratings GmbH and Scope Ratings UK Limited apply the same methodologies/models and key rating assumptions for their credit rating services, while Scope Hamburg GmbH’s methodologies/models and key rating assumptions are different from those of Scope Ratings GmbH and Scope Ratings UK Limited.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/#!governance-and-policies/rating-scale. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/#governance-and-policies/rating-scale. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Credit Ratings were not requested by the Rated Entity or its Related Third Parties. The Credit Rating process was conducted:
With Rated Entity or Related Third Party participation    NO
With access to internal documents                                 NO
With access to management                                          YES  
The following substantially material sources of information were used to prepare the Credit Ratings: public domain and Scope Ratings’ internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting the Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data. Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and Outlook and the principal grounds on which the Credit Ratings and Outlooks are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
The Credit Ratings and Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and Outlook are UK-endorsed.
Lead analyst: Tommy Träsk, Director
Person responsible for approval of the Credit Ratings: Olaf Tölke, Managing Director
The issuer Credit Rating/Outlook was first released by Scope Ratings on 25 July 2016. The Credit Rating/Outlook was last updated on 29 September 2021.
The senior unsecured debt Credit Rating was first released by Scope Ratings on 11 January 2018. The Credit Rating was last updated on 29 September 2021.

Potential conflicts
See www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures for a list of potential conflicts of interest related to the issuance of Credit Ratings.

Conditions of use / exclusion of liability
© 2021 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Analysis GmbH, Scope Investor Services GmbH, and Scope ESG Analysis GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5 D-10785 Berlin.