Signa is a harbinger of the pain to come in CRE

If Austrian property group Signa Holdings had been a publicly quoted company, then its insolvency would have been front-page news all around Europe.

Lack of transparency makes its piece-by-piece collapse hard to quantify. But the episode may be a harbinger of serious pain still ahead for banks and bond investors exposed to commercial real estate (CRE).

On Wednesday November 29, the company applied to open restructuring proceedings under self-administration at the Vienna commercial court.

At first sight, the amounts involved are not so worrying.

The Alpine Association of Creditors (AKV) reports that Signa Holdings has total liabilities of around €5 billion while, according to the application, it has assets with a book value of around €2.77 billion.

However, their liquidation value is only €314 million.

The company is seeking debt relief as part of a restructuring plan that proposes creditors receive a quota of 30%, payable within two years.

Is this going to be a pattern across the Signa group of companies?

Signa Holdings is just one entity among a much bigger group of private property companies built up by Austrian billionaire René Benko over the past 20 years on the back of equity investment by other European family offices and hefty leverage through secured bank loans and unsecured bond borrowings.

These companies have been hit hard by rising interest rates and costlier debt servicing, asset write-downs and higher construction costs.

The situation has become a slow-motion train wreck, with different group companies hitting problems, leaving creditors and analysts struggling to trace the flow of funds between what may be up to 1,000 interlinked entities and claims of outside creditors on collateral protection.

The biggest company, Signa Prime Selection, owns and develops commercial property in prime city-centre sites mainly in Germany and Austria, including hotels, luxury shopping centres and office buildings.

It puts a valuation of €20.4 billion on these assets. But signs of trouble have been growing, notably with construction recently halted on the 64-story Elbtower, a mixed-use skyscraper in Hamburg, over constructors’ claims of unpaid bills.

Another big group company is Signa Development Selection, which has issued bonds to finance the construction and development of office blocks, retail spaces, hotels and housing away from prime city-centre locations.

It reports a €4.6 billion balance sheet.

Fitch downgraded Signa Development to CCC on November 6 after it admitted liquidity challenges and the need to speed up the sale of properties to bolster its cash position. Fitch sees a risk that Signa Development has increased lending to other companies within the Signa group, noting an increase of its “other financial receivables", including loans to indirect shareholders, by €215 million in the first half of 2023.

In October, a much smaller company, Signa Sports United, a specialist sports equipment e-tailer, hit problems when Signa Holdings terminated an unconditional €150 million equity commitment letter that had covered the smaller company’s operating financial needs and maintained it as a going concern.

On November 8, Benko handed over chairmanship of the supervisory board of Signa Holding to Arndt Geiwitz, a restructuring and insolvency lawyer, saying that “it is now important to restore trust.”

Rothschild & Co and White and Case will advise Signa Prime and Signa Development while Geiwitz organizes the restructuring of the entire Signa Group.

No one yet knows where the pain will land on banks and bondholders. Multiple sources say that the ECB has required banks to scrutinize and revalue property collateral backing loans to Signa Group companies.

Natixis, Bank of China and Raiffeisen Bank International have previously provided loans to Signa Prime Selection.

On November 10, Julius Baer announced a SFr70 million ($80 million) provision against a SFr606 million exposure in its private loan book across three loans to different entities within what it calls “a European conglomerate”.

The Swiss private bank extends structured credit to ultra-high net-worth clients secured against real estate. It has declined to name the client but says that the problem exposure is secured by multiple collateral packages related to commercial real estate and luxury retail that is now subject to a longer-term restructuring.

The widespread assumption is that this is the Signa group of companies.

Julius Baer’s shares have fallen 20% since the news. The bank has said that even under a hypothetical total loss, the group’s pro-forma common equity tier-1 (CET1) capital ratio on October 31, 2023, would have been more than 14% and that Julius Baer would have remained profitable.

Should we expect more such announcements from other European banks?

Right now, hopes are growing for rate cuts next year, while lower valuations are tempting some real-estate investors to raise funds to hunt for bargains among buildings that may command lower values now but that still have occupiers paying rent.

Unbuilt speculative developments that have not been completed, pre-sold or pre-let are an altogether different matter.

S&P points out that, on average, commercial real estate accounts for 11% of loans of large European banks. Exposures underwritten at conservative loan-to-value ratios should be manageable.

But higher-for-longer rates will hurt, while secular changes to work arrangements will continue to hit offices.

Thomas Rothaeusler, analyst at Deutsche Bank, suggests 2024 will be another tough year for real estate when the impact of rate hikes starts to be felt.

“Further mark-downs on full-year appraiser values are likely to spark defaults, triggering more distressed situations, while large-scale breakups are likely to burden sentiment,” he notes.

“We're afraid that Signa and WeWork will not remain the only troubles.”