It seems that Israel's investment institutions have learned their lesson from the collapse of government-controlled Agrexco: they demanded guarantees for the bonds issued by Israel Natural Gas Lines Ltd., which raised NIS 500 million in 11-year bonds at an interest rate of 4.8%.
Agrexco went bankrupt without paying its debt to bondholders. In guarantees in the Natural Gas Lines offering included a priority floating lien on the account that will be used to service the bond debt, into which 95% of the company's receipts from gas deliveries are deposited. The debt-to-coverage ratio was set at 1:2, and by law the Natural Gas Authority must set gas transportation rates at a level sufficient for the company to meet this ratio.
The investment manager at a large institution said, "If we were to make a comparison with electricity rates, we see that it's not so easy to rate rates. Who says that we won't face the same difficulties with gas? Besides, laws can be changed."
Another investment manager expressed confidence that the government would support Natural Gas Lines, in contrast to the case of agricultural produce exporter Agrexco. "Natural Gas Lines is a national project and the importance of a gas pipeline network is clear to everyone. Who will transport gas if not Natural Gas Lines?" he said.
However, in the aftermath of the Agrexco affair, not all investment institutions are so sanguine that being a government company gives Natural Gas Lines an advantage. Agrexco went into liquidation proceedings in June 2011, and when no buyer could be found to keep all its employees and pay the company's debts, it was sold to Bickel Group Export and Trade Ltd. and Lamdan-controlled Orian SM Ltd. (TASE:ORIN) for just NIS 17.6 million, and its NIS 500 million debt, including NIS 150 million to investment institutions, was written off.
"In the past, a premium was given to companies whose controlling shareholder was the State of Israel. Today, we know that this controlling shareholder does not back the companies it owns. Who know what will happen in five years?," said an investment manager of one of the institutions that participated in the offering. He added that the Agrexco less, together with the interest rate offered and the long duration of the bonds did not reflect Natural Gas Lines' real risk.
Just a year earlier, the company issued bonds at a margin of 1.6 percentage points above the government bond rate. The margin in last weeks offer was 2.4 percentage points higher.
Government-owned Natural Gas Lines has a franchise to build the natural gas pipeline network and operate it for 30 years. It has already built four sections of the network: the marine section (in operation since May 2006), the central section (in operation since May 2007), the southern section (in operation since November 2009), and the northern section. Other pipelines and facilities are in the planning stages, including a floating buoy for gas imports, and the eastern pipeline to Jerusalem. The capital raised in the latest bond issue is to finance construction of the floating buoy.
Standard & Poor's Maalot Ltd. states in its rating for Natural Gas Lines, "During 2012, we expect the ratio to be higher than the minimum coverage, at 1.96. In the long-term, we believe that this ratio will fall to 1.2, when the company's debt repayments will rise. However, the company's customer base will probably grow strongly in 2013."
Published by Globes [online], Israel business news - www.globes-online.com - on January 8, 2012
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