BoI tells banks to classify IDB loans as problem debt

Supervisor of Banks David Zaken is believed to have instructed the banks to classify IDB debt as "impaired", the highest risk category.

The Bank of Israel is concerned about the financial position of IDB Holding Corp. Ltd. (TASE:IDBH). "Globes" has learned that Supervisor of Banks David Zaken has instructed the banks to classify the debt of IDB, controlled by Nochi Dankner, as problem debt. "Globes" has also learned that some of the banks, including one of the large banks, have already carried out the classification, and that provisions were made against IDB's debt in previous financial statements. The Bank of Israel declined to comment on the report.

IDB's debt to the banks is spread among the companies in the group. The debt of controlling shareholder Ganden is estimated at NIS 500 million, IDB Holding's debt is NIS 130 million, while the debt of IDB Development, whose financial position is better than that of the previously mentioned companies, is about NIS 2 billion.

The debt to be classified as problem debt is credit granted to the holding companies at the head of the pyramid, and not credit granted to the subsidiaries, such as Cellcom Israel Ltd. (NYSE:CEL; TASE:CEL), Shufersal Ltd. (TASE:SAE), or Koor Industries Ltd. (TASE:KOR). Most of the credit is from Bank Hapoalim (TASE: POLI) and Bank Leumi (TASE: LUMI). Bank Leumi is chiefly exposed through credit granted to Ganden.

Highest risk level

Sources also inform "Globes" that the Bank of Israel sought to ensure that the debt of parent company Ganden should be classified as problematic. In the first quarter, Bank Leumi and Mizrahi Tefahot Bank (TASE:MZTF) made provisions of at least NIS 240 million against loans to Ganden. The provisions were made because of the fact that the shares in IDB held by Nochi Dankner, which represent the collateral for the loans, have fallen in price by tens of percentage points in the first quarter, such that their value was, and remains, substantially lower than the debt.

The Bank of Israel defines three types of problem debt: debt under special watch; underperforming debt; and impaired debt. It is believed that the banks will have to classify IDB's debt as impaired debt, the classification bearing the highest risk.

Impaired debt is defined as credit that, on the basis of existing information, the bank foresees that it will not be able to collect. Under the rules, the bank must examine whether the lender is capable of raising money from other sources at normal market levels of interest. IDB's bonds are currently traded at yields of tens of percentage points, so that recycling debt in its present state is an impossible task. Under the rules, if debt is classified as impaired, the bank must make a provision of at least 4% of the debt amount.

IDB's financial position has been shaky for some time. At the end of the first quarter of this year, IDB Holding had debt totaling more than NIS 2 billion, against NIS 485 million cash, and a shareholders' equity deficit of NIS 634 million. The company has to repay loans of NIS 375 million by the end of 2o13. Its bonds are traded at a yield of 115%.

IDB is due to relase its second quarter financial statements next week. It is currently in discussions with the Israel Securities Authority on whether it should append a "going concern" qualification to its statements. Dankner has said more than once that he has no intention of reaching a debt arrangement with the bondholders and the banks, and in the past year he has acted in a determined fashion to realize assets. Among other things, he has sold Clal Industries to Len Blavatnik, and has attempted to sell Clal Insurance Enterprises Holdings Ltd. (TASE: CLIS). At the same time, the group has been trying to raise finance or bring in an investor.

IDB said in response, "IDB Holding has a cash balance that enables it to pay its debt in full or a year, and is under no liquidity pressure in the near term. The company's management is acting diligently and with determination to expand the company's liquidity substantially and to ensure its financial strength for the long term. Among other things, this is on the basis of the group owning a high quality asset portfolio with very considerable potential for enhancement in the long term."

Published by Globes [online], Israel business news - www.globes-online.com - on August 22, 2012

© Copyright of Globes Publisher Itonut (1983) Ltd. 2012

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