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Adler is another good mess for German capital markets

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Less than two years after the collapse of Wirecard AG revealed huge flaws in German financial regulation, Europe’s largest economy is facing yet another corporate mess.

Senior executives at listed German owner Adler Group SA resigned over the weekend after auditor KPMG refused to approve its annual accounts, saying it had been denied access to necessary information. Adler shares fell almost 30% on Monday and some of Adler’s bonds plunged to around 50 cents on the euro, indicating substantial distress. Adler shares rallied somewhat on Tuesday after the company placed guarantees on its cash position. The company is almost 8 billion euros ($8.4 billion) in debt, so much depends on how the situation is resolved.

Without approval from auditors, Adler will have a hard time raising new money and faces possible litigation from investors. The Berlin-focused owner was already under pressure after a separate KPMG forensic investigation of several allegations raised in October by short-seller Fraser Perring’s Viceroy Research failed to fully exonerate the company and highlighted a number of governance failures.

QuicktakeThe Murky Adler Situation

Were German regulators asleep at the wheel again, leaving the hard work of identifying corporate racketeering to short sellers and financial journalists? Perhaps, but in the wake of Wirecard, Germany has tightened financial supervision. Regulators and auditors are now determined to show that they are not easy to convince.

Adler certainly feels that pressure. Since last year, companies listed on the Dax indices have been required to promptly submit audited annual accounts or face immediate expulsion. So, after postponing their results once, the S-Dax-listed group couldn’t beat around the bush any longer, audit opinion or none. (Adler also needed to post audited accounts to comply with bond covenants.)

BaFin also gained new powers this year to investigate corporate accounts after the dissolution of Germany’s toothless financial reporting watchdog FREP. BaFin’s investigation into Adler’s finances is ongoing.

Adler Chairman Stefan Kirsten, a real estate veteran who joined in February, praised BaFin last month for asking “very good questions” and noted that supervision of the German capital market had “significantly improved” since Wirecard. His charm offense is understandable, but the new regulatory stringency won’t help Adler quickly overcome his compliance woes.

Adler was surprised by the severity of the KPMG audit, saying over the weekend that there was “a high level of mistrust” between the company and its auditors. However, critics have long urged the audit profession to act more like bloodhounds than docile watchdogs, so perhaps the bean counters are finally displaying the appropriate skepticism. Audit firms that ignore the red flags risk becoming the target of shareholder litigation, so it is in their best interest to be cautious.

KPMG’s separate 125-page forensic review found no evidence that Adler’s property portfolio is systematically overvalued, but did reveal a litany of alarming governance and compliance deficiencies. Surprisingly, Adler turned over no more than 800,000 documents. His excuse of protecting attorney-client privilege felt unsatisfactory.

Indeed, since so much information was withheld, it was unwise for Adler to downplay the seriousness of KPMG’s findings, which had uneasy echoes of the way Wirecard’s board of directors handled a similar outside investigation.

Rival German owner Vonovia SE was also too keen to move on. Rather than wait for the results of the KPMG investigation, Vonovia provided a €250 million emergency loan to Adler’s main shareholder, Aggregate Holdings, in October. When Aggregate failed to meet a margin call in February, Vonovia seized a 20.5% stake in Adler as collateral. Those shares are now worth 160 million euros. Oops.

Adler has about 700 million euros in cash and proceeds from asset sales, and other transactions should leave him with more than double that by the end of the year, according to an investor slideshow released on Tuesday. So at least you shouldn’t be facing an immediate cash crisis. A €1.1bn impairment at its Consus development unit has put Adler in default on a bond deal, but this, too, should be remedied relatively easily.

The immediate priority is to convince the auditors to sign off on the accounts, but regaining the confidence of the capital markets will not be easy. Investors may be waiting for an acquirer to step forward to enable a fresh start.

Adler’s nearly €800m market capitalization is a fraction of the book value attributed to its holdings, and therefore a potentially tempting target. However, Vonovia has ruled out buying more shares and others may have similar reservations until BaFin steps in. Once again, all eyes are on Germany’s financial regulators. Maybe this time they have something to say.

More from the writers of Bloomberg Opinion:

• Wirecard has shattered confidence in Germany’s capital markets: Chris Bryant

A $2 Billion Reminder To Doubt Your Audit Client: Chris Hughes

• Clear up yacht ownership and other financial secrets: Paul J. Davies

This column does not necessarily reflect the opinion of the editorial board or of Bloomberg LP and its owners.

Chris Bryant is a columnist for Bloomberg Opinion who covers industrial companies. He previously worked for the Financial Times.

More stories like this are available at bloomberg.com/opinion