Menorah Mivtachim Holdings Ltd. (TASE: MORA) has recognized losses on its investment in IDB Holding Corp. Ltd. (TASE:IDBH) bonds, following in the path of Bank Leumi (TASE: LUMI) and Mizrahi Tefahot Bank (TASE:MZTF), which wrote down hundreds of millions of shekels in loans granted to Ganden Investments Ltd., through which Nochi Dankner controls IDB.
"We advise classifying IDB bonds as problem debt," states Menorah, in an internal document obtained by "Globes". The document, written a month ago, is pessimistic about the ability of IDB Holding, the top of Dankner's pyramid, to repay its debt.
Menorah states, "The current situation does not allow IDB Holding access to financing sources, its liquidity is weak, and it is liable to face a cash flow crisis in the second half of 2013." The document continues, "IDB Holding has no current sources, in view of the absence of stable dividends from subsidiary IDB Development Corporation. The company is highly dependent on the sale of assets and the refinancing of loans. Under the optimistic scenario that it presents, it expects to burn NIS 525 million in cash over the next two years, and have no money left by March 2014."
IDB Holding's solo debt is NIS 2 billion in five bond series, which are currently traded at junk bond yields of up to 68% (for the Series C bond). The price for the bond has risen 15% in the past few days, in response to a series of positive announcements about progress in the sale of Clal Industries and Investments Ltd. (TASE: CII), and an expected improvement in the results of Credit Suisse Group AG (NYSE: CS; SWX: CSGN; XETRA: CSGZ), in which IDB is a shareholder through subsidiary Koor Industries Ltd. (TASE:KOR).
Menorah also mentions the scenario of the liquidation of IDB. "With the immediate sale of assets, the bondholders will receive just 10% of their debt, without taking into account the liquidation costs."
Menorah points to some positive points at IDB: its dominance in key economic sectors, there are no liens on IBD Development's holdings, and IDB shareholders are willing to inject capital into it. However, Menorah warns of IDB Development's high indebtedness, and advises reclassifying the company as problem debt. IDB Development's bond debt totals NIS 4.3 billion, and its four bonds are traded at yields of up to 36%.
Menorah points to IDB Development's heavy dependence on Koor's investment in Credit Suisse shares, and to tighter regulation that is affecting other key subsidiaries. "Most material holdings, such as Cellcom Israel Ltd. (NYSE:CEL; TASE:CEL) and Shufersal Ltd. (TASE:SAE) are facing deteriorating business and falling profits."
Menorah also notes that IDB Holding and IDB Development can longer withdraw dividends from IDB Development subsidiary Discount Investment Corporation (TASE: DISI) (the parent company of Cellcom, Shufersal, and Koor), due to a negative profit balance. Menorah advises placing Discount Investment's debt on the watch list, despite an assessment of full recovery. The company's bond debt totals NIS 5.5 billion, and its five bonds are traded at yields of up to 20%. Menorah warns that the company could face a cash flow problem in 2014, unless it sells subsidiaries and completes the proposed merger with Koor.
Koor is set to write off NIS 1 billion on its Credit Suisse investment in the second quarter of 2012, due to a 33% drop in value in the holding during the quarter, compared with a profit of NIS 500 million in the first quarter. Koor also faces a tax payment of NIS 633 million on past profits on the Credit Suisse investment.
Menorah is less worried about companies lower down on the IDB pyramid, and estimates the recovery rate at 75%. It favorably mentions Clal Industries and Clal Insurance Enterprises Holdings Ltd. (TASE: CLIS), as well as oil and gas exploration assets, which offer IDB ways to meet its cash needs, including the sale of Clal Industries and Clal Insurance.
Three pending transactions, assuming they materialize, will give IDB breathing room: the sale of 50% of Clal Industries to Len Blavatnik's Access Industries Inc. at a company value of NIS 2.55 billion; the sale of 55% of Clal Industries' subsidiary Mashav Initiation and Development Ltd. (which owns Nesher Israel Cement Enterprises Ltd. and half of Taavura Holdings Ltd. to the Livnat family for NIS 1.3 billion; and the Discount Investment-Koor merger, which has been suspended for the moment.
Published by Globes [online], Israel business news - www.globes-online.com - on July 3, 2012
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