Property Firm Targeted by Muddy Waters Risks Key Client Loss

(Bloomberg) -- German real estate investment firm Corestate Capital Holding SA, the latest target of short-seller Muddy Waters, faces the possibility of losing a key client.

Consus Real Estate AG, a top borrower in Corestate funds that lend to property developers, is winding down its reliance on mezzanine debt and getting cheaper finance elsewhere. Mezzanine finance absorbs losses before any other class of debt and therefore requires higher interest payments to compensate lenders for the risk.

Consus raised 50 million euros ($56 million) in the high-yield bond market on Thursday. While it’s paying a 10.6% yield on the new bonds, that’s still a significant saving in borrowing costs as Corestate’s loans charge as much as 23%, according to filings posted on Germany’s federal register.

The high-yield bond is part of a broader plan outlined in Consus’s first-half earnings to repay most of its 500 million euros of mezzanine debt by the end of March.

That’s an unwelcome development for Corestate which makes money from charging interest and fees on mezzanine debt provided to developers such as Consus.

Debt to finance Consus-backed projects comprised at least a quarter of the 1.2 billion euros in loans held in Corestate’s Stratos II and IV funds as of October 2018, according to the vehicles’ most recent official filings. Some of those loans have reached maturity since the last filing.

A spokesman for Consus confirmed the company’s strategy, but declined to comment on the details of the mezzanine loans.

Corestate said that all scheduled repayments of debt for the next three quarters is covered by new projects.

“The demand from our clients is continuously very high, so these planned outflows can easily be compensated at the very same conditions,” Corestate said in a written response to questions from Bloomberg. The company added that the funds have been fully deployed since inception and “this will be kept stable also in 2020.”

Short Sellers

Corestate is being targeted by short sellers and its shares lost almost a fifth of their on Oct. 16 after regulators disclosed Muddy Waters had placed a 3 million-euro bet against it without revealing why. The U.S. fund’s position made Corestate the most shorted company in Germany, according to Markit data.

Read More: Corestate Shares Slump After Muddy Waters Discloses Short

Corestate released a statement the day after the share-price fall, highlighting its “consistently positive operating performance in 2019 and the attractive growth prospects across all business areas and products.”

It also reiterated its financial outlook for the year, forecasting revenues between 285 million euros and 295 million euros and adjusted net profit as high as 140 million euros. Corestate will next announce earnings on Nov. 12.

Corestate’s shares retreated from a 5.4% gain on Thursday, falling as much as 1.2% from where they opened.

The Stratos funds were acquired in 2017 as part of Corestate’s takeover of Helvetic Financial Services. Stratos II alone accounts for about 36% of Corestate’s total revenues for 2018, according to its latest annual report.

Last week’s bond sale from Consus is part of its strategy to reduce reliance on expensive debt and followed the sale of 400 million euros of high yield bonds earlier this year.

©2019 Bloomberg L.P.