Clal Finance Ltd. analyst Yuval Ben-Zeev today gave Africa-Israel Investments Ltd. (TASE:AFIL; Pink Sheets:AFIVY) a "Sell" recommendation and removed his target price of NIS 35, without setting a new one. The recommendation followed Africa-Israel's bondholders meeting on Sunday, where CEO Izzy Cohen admitted that the company would probably not be able to meet its debt commitments.
At the outset, Ben-Zeev warns, "An investment decision involves high risks", and he goes on to detail why. In view of the risk that Africa-Israel will not be able to meet its debt payments, shareholders will lose their holdings in favor of bondholders. Even if a debt settlement is reached - which will be difficult in view of the large number of bond series and bondholders - shareholders will see their holdings massively diluted.
Conflicts of interest among Africa-Israel bondholders will hinder a debt settlement. Holders of Series 9 bonds, which are due to be redeemed in the a few months, will present obstacles to a settlement. Ben-Zeev doubts whether Africa-Israel can reach a settlement without intervention by the courts.
Ben-Zeev also notes that the adjusted value of Africa-Israel bond and bank debt is NIS 8 billion, while the market value of marketable and non-marketable holdings is NIS 5.5 billion. The gap between the company's debts and assets will greatly complicate a debt settlement and repayment of the bonds.
At the bondholders meeting, Cohen said that short-term bondholders would probably not receive priority, because of the "large number" of bondholders. This means that the bonds' maturity dates are meaningless, and that their duration is merely theoretical. It also means that attention should be paid to the ratio between the bonds' prices and their adjusted value, not to their yield or duration.
Ben-Zeev therefore sees no point in owning Africa-Israel shares. He believes that the company's bondholders will very quickly become its main shareholders, and that owning the company's bonds will increase opportunity and reduce risk.
Africa-Israel's share fell 3.9% by mid-afternoon today to NIS 35.27, giving a market cap of just over NIS 2 billion.
Published by Globes [online], Israel business news - www.globes-online.com - on September 15, 2009
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