Market tense ahead of Delek Real Estate settlement plans

It seems that, for now, the market has confidence in Yitzhak Tshuva.

This Sunday, Delek Real Estate Ltd. (TASE: DLKR, controlled by Yitzhak Tshuva, will announce its plan of action to pay its debts to its bondholders. The company is expected to request a 4-5 month postponement of the NIS 300 million bond payment due in September.

In exchange, Delek Real Estate will raise the interest on the bonds or add collateral. Tshuva is also expected to announce further support for the company as a vote of confidence in it. Delek Real Estate's Series 4 bond rose 0.4% today and its Series 5 bond rose 1.6%, but the Series 25 bond fell 5.1%. The share price fell 0.8% to NIS 0.25, giving a market cap of NIS 80 million.

In contrast to the criticism of the debt settlement for Tao Tsuot Ltd. (TASE: TAO-M) proposed by Ilan Ben-Dov and the anger of the investment institutions, the attitude toward Tshuva and Delek Real Estate is much more sanguine, and it seems that, for now, the market has confidence in Tshuva.

"We have to hear exactly what Tshuva will offer, but it's clear that the investors prefer postponement over liquidation. It seems that the market will give Tshuva a chance, after he has already personally injected quite a lot of capital," Altshuler Shaham Ltd. co-CEO Gilad Altshuler said today. The investment house owns NIS 13.7 worth of Delek Real Estate bonds.

Altshuler tempers his optimism with some doubts. "No one knows Tshuva's ability to inject capital into the company," he says, adding, "I don’t know Tshuva well enough, but I believe that the debt will be repaid in full one way or another. For example, in a settlement similar to one at Africa-Israel Investments Ltd. (TASE:AFIL), in which investors got back almost all the debt.

"If the settlement is accompanied by an aggressive haircut, the attitude toward him might change. That's why some institutions first want to see what he will offer before deciding whether to participate in offerings by other Tshuva companies," said Altshuler.

Paralleling Delek Real Estate's preparation of a debt settlement, sister company Delek Group Ltd. (TASE: DLEKG) announced that it plans to raise NIS 200 million in debt. In the past few days, investment institutions have been saying that they won't participate in the offering to punish Tshuva for the expected debt settlement by Delek Real Estate.

"Everyone who holds debt of more than one of Tshuva's companies should link to the debt of another of his companies," said the CEO of a large investment institution. "It's impossible to walk with one pocket full and another pocket empty. That said, the case of Delek Real Estate is different from that of Tao. First of all, the debt is much larger, and secondly, because, until now, Tshuva has put his hand into his pocket and not sat with arms folded."

Alshuler believes otherwise. "If we see willingness on his part, and we've already seen Tshuva's willingness to help his companies, there will be no reason to punish him and to avoid offerings by his other companies. We've already seen two cases of debt settlements (Africa-Israel and Zim Integrated Shipping Services Ltd.) which the market accepted with grace, and the owner wasn’t punished," he says.

Delek Real Estate owes bondholders NIS 2.1 billion out of a total consolidated debt of NIS 15 billion. It has no cash and a shareholders' equity deficit of NIS 1.3 billion. Investment institutions reportedly own half of the company's bonds (compared with 20% of Tao's bonds). The rest are held by private investors and speculators, who bought bonds cheaply from institutions seeking to unload them.

Leader Capital Markets VP trade Alon Glazer and Clal Finance research director Yuval Ben-Zeev believe that the chance of Delek Real Estate repaying its debt in full is mainly a question of time. Ben-Zeev is doubtful, saying, "A lot of things would have to happen, including a strong tail wind from the real estate market and exchange rates. The chances of this don't look good right now."

In a review in March, Ben-Zeev said, "The chances are growing that Delek Real Estate will turn to negotiations for a debt settlement, including converting a substantial part of the debt into equity."

At the time, Delek Real Estate said in response, "A debt settlement is not on the agenda."

Today, Ben-Zeev said, "I've been saying it for months: Delek Real Estate has a problem, and without time or very deep pockets of its controlling shareholders, it won't be able to pay." And yet, he adds, "With such a huge deficit hole, I doubt Tshuva can and/or wants to personally pay in full."

Glazer also believes that time is the critical factor. "Time to allow for profits is very important. Obviously, Delek Real Estate has a problem to repay everything, but time can improve its ability to meet its debt in full."

Glazer adds, "In contrast to other controlling shareholders, we've seen Tshuva make an effort to sell assets, and most of all, he injected large amounts of capital. When there is talk about linking Delek Real Estate to the controlling shareholder, this is the place where we've seen Tshuva do as much as possible. All in all, I consider his conduct to be exemplary."

Glazer believes that Tshuva's other companies should not be punished by avoiding their debt and capital offerings. "When Delek Real Estate raised capital, it did so at wider margins than Delek Group, because of the differences between the two companies. Taking into account the fact that this is a limited company, Tshuva's conduct signals, 'I won't disown it'."

Leader Capital Markets is an underwriter in Delek Group's debt offering.

Published by Globes [online], Israel business news - www.globes-online.com - on July 21, 2011

© Copyright of Globes Publisher Itonut (1983) Ltd. 2011

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