Fixed Income. O1 Properties - Debt Restructuring Offer Could Be Better

O1 Properties has launched a consent solicitation to restructure the terms on the O1 Properties 21. It is proposing extending the maturity by seven years, lowering the coupon from 8.25% to 0.50% and linking payments to the ruble using an exchange rate of USD/RUB 58. The company is also seeking a raft of amendments to key covenants and conditions. We would not describe the proposed offer as attractive for Eurobond holders, and we expect them to continue to negotiate for better terms.> Modifications to terms. O1 Properties is proposing to extend the maturity of the notes from September 27, 2021 to September 27, 2028, change the coupon from 8.25% to 0.50% and link payments to the ruble at an exchange rate of USD/RUB 58. > Substantial amendments to all key covenants. O1 Properties is also asking for removal of the change-of-control put option and the relaxation of restricted payment, debt incurrence and asset sale covenants.> Pandemic hits real estate market. O1 Properties has been experiencing serious difficulties servicing its debt - and its credit profile was weak even prior to the downturn. The company expects its net rental income in ruble terms to fall 15-25% over the next 6-12 months.> Massive debt restructuring. In 2020, O1 restructured several senior loans and a mezzanine loan, improving its near-term repayment profile. The lenders of the mezzanine loan, which was secured against a stake in a subsidiary, agreed to take an economic haircut of around 15%. O1 also agreed with all senior lenders to defer some of the debt payments originally falling in 2Q-3Q20 to 2021. It is also working on restructuring around $29 mln in local bonds. > Situation set to improve next year. A supply deficit of available quality space in Moscow, especially in the Class A segment, has emerged over recent years, and this shortage appears set to grow as the post-Covid recovery gains momentum. O1 Properties has a high quality portfolio, so we expect these trends to support the company's operations next year. > Offer does not look attractive to us. We derive an NPV from the proposed restructuring terms, which is based on the USD/RUB forward curve and a 12% discount rate. The model derives an NPV of 25% of par. Adding in the early consent fee takes this up to 30% of par, which equates to a 70% haircut. We find this hard to describe as attractive.