Africa-Israel: Asset sales may not be enough to pay debts

Shares in Africa-Israel plunged after the company reported a NIS 1.52 billion loss, and said it will seek a settlement with bondholders.

Africa-Israel Investments Ltd. (TASE:AFIL; Pink Sheets:AFIVY) last night published its consolidated financial report for the second quarter of 2009. In view of the company's heavy losses, and at the recommendation of its auditor about uncertainty over the company's plan to deal with the global financial crisis, the company announced that it will seek to reach a settlement with its bondholders.

Africa-Israel's share price fell 25% at the opening today to NIS 51.71, giving a market cap of NIS 3.82 billion.

Africa-Israel posted a net loss of NIS 1.52 billion for the second quarter, compared with a net loss of NIS 12 million for the corresponding quarter of 2008. Net loss attributable to majority shareholders ballooned to NIS 1.32 billion for the second quarter, from NIS 91 million for the corresponding quarter. Most of the losses were due a NIS 1.31 billion reduction in fair value on the company's real estate investments. The company also lost NIS 262 million on exchange rate differentials.

In the director's report, Africa-Israel explains, "Since the worsening of the global crisis and the drastic plunge in the value of real estate worldwide, the company's management has been energetically seeking to sell worthwhile properties in order to repay its extensive financial liabilities." It adds, "We believe that the company can continue to meet its liabilities in the foreseeable future, in line with its forecasts about sources and their use, as stated in public announcements."

However, it warns, "It cannot be ignored that the continuation of the crisis in the company's main markets, and the company's ability to successfully repay liabilities clearly depends on its ability to sell assets during a prolonged period of years exacerbates the uncertainty currently facing the company's management."

Africa-Israel concludes, "From a long-term perspective, there is doubt about the company's ability to continue successfully meeting in full its sale of assets throughout the full period of its liabilities in the amount needed to repay in full its future liabilities. In order to provide a reasonable response to additional risks and adverse changes that are liable to occur in the future, and as a function thereof, to improve the company's chances of paying its liabilities during this extraordinary period, the duty of caution and responsibility requires Africa-Israel to begin restructuring its debts."

Last week, Africa-Israel published a profit warning, saying it expected to lose NIS 1.4 billion for the second quarter, because of reduction in fair value on properties in the US, held through AFI USA Investments Inc., and Russia, held through AFI Development plc (LSE:AFID).

Operating loss was NIS 1.38 billion for the second quarter, compared with an operating profit of NIS 215 million for the corresponding quarter.

Net loss on real estate operations was NIS 1.29 billion for the second quarter, compared with a net profit of NIS 115 million for the corresponding quarter.

Africa-Israel had NIS 21.2 billion in available credit at the end of June, of which NIS 8.3 billion was short-term credit and NIS 12.9 billion was long-term credit. The company had NIS 2.7 billion in liquidity at the end of June, including short-term investments. Its market cap is NIS 4.7 billion, with no liens on its share capital.

Africa-Israel paid NIS 3.3 billion in interest and principle payments on its bonds in the first half of the year.

Africa-Israel points to five problems:

  1. The sale of income-producing properties has reduced its cash flow and hurt its core business.
  2. Current market conditions have made it difficult to obtain financing to develop and redevelop properties, as well as to recycle financial debt needed for current operations. The credit crunch has affected the obtaining of financing by potential buyers of properties that Africa-Israel has put up for sale, and made it harder to get a closed deals at a good price.
  3. It is not possible at this time to rely on an improvement in the company's main markets, such as the US, Eastern Europe, and Russia.
  4. The greater uncertainty reduces the company's bargaining power with potential buyers of its properties, while it also tightening the deadlines for the repayment of debts, which makes it harder to complete negotiations for the sale of properties.
  5. These negotiations reduce management's time to deal with the development and redevelopment of the company's properties, execute the company's long-term strategy, improve its current and future cash flow from projects, achieve profits, and create value for the company's properties for the benefit of its shareholders and bondholders.

    Published by Globes [online], Israel business news - www.globes-online.com - on August 30, 2009

    © Copyright of Globes Publisher Itonut (1983) Ltd. 2009

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