IDB bond trustees prepare for going concern warning

If a going concern warning is attached to IDB Holding's financial report, it could trigger talks for a debt settlement.

Worries are growing that IDB Holding Corp. Ltd. (TASE:IDBH), controlled by Nochi Dankner, will attach a going concern warning to its financial report for the second quarter of 2012. The trust companies for IDB's bonds have joined negotiations between IDB's auditors BDO Ziv Haft Ltd. and KMPG Israel Somekh Chaikin and the Israel Securities Authority. Sources inform ''Globes'' that the trustees met Securities Authority officials in Jerusalem yesterday to discuss the likely consequences of a going concern warning for IDB, which will publish its financial report by the end of this week.

So far as is known, IDB executives successfully persuaded its auditors and the Securities Authority that no going concern warning will be attached to the financial statement of IDB Holding subsidiary IDB Development Corporation Ltd., following the sale of assets and its ability to transfer money to IDB Holding. However, no decision has yet been made for IDB Holding.

IDB Holding's shareholders' equity deficit reached NIS 634 million at the end of March. If a going concern warning is attached to its financial report, it could trigger talks for a debt settlement. Under these circumstances, the trustees - Hermetic Trust (1975) Ltd.Strauss Lazar & Co., and Kaldan Escrow Company Ltd. - will have to convene bondholders meetings to discuss the consequences of the warning. One consequence could be demands for immediate repayment of the bonds, but even in the absence of such a demand, Dankner will have only a few months to solve IDB's cash flow problems.

IDB Holding's next debt payment is a NIS 65 million interest payment on its Series 4 bond, due in December. If a going concern warning is attached to the company's financials, the bondholders of the company's other bonds might oppose the payment, claiming creditors' preference at a time when the company's future is shrouded in doubt.

From this point, the decline could be swift, as non-payment of the debt on schedule is a violation of the bond's terms, and the road to demand for immediate repayment or a debt settlement is short. Given the current price for the Series 4 bond, the market seems to have already priced in non-payment of the interest due in December.

The Series 4 bond, which totals NIS 1.16 billion, is currently traded at just NIS 0.18, giving a yield of 76%. The upcoming interest payment is NIS 0.06 per bond. In other words, buyers of the bond at its current price will get back a third of their investment in four months. Despite the chances of such a quick return, there are few buyers for the bond.

IDB Holding's financial situation is complicated, and this is reflected in its bond yields: 76% for the Series 4 bond; 181% for the Series 3 bond, which totals NIS 323 million; and 180% for the Series 5 bond, which totals NIS 125 million. The company's total debt is estimated at NIS 2 billion, including NIS 1.61 billion in bonds. The company has NIS 200 million in cash, after the recent bond repayments, and it is due to pay out NIS 500 million over the next two years.

The reason for the possible going concern warning is that it not clear how IDB will make up the shortfall. IDB Holding cannot use cash held by IDB Development, because it has a negative balance of profits for distribution. IDB Development is also bound by financial covenants with the banks, which include a ban on dividends.

IDB Holding has the option of closing the shortfall by raising capital, as it has mentioned in previous financial reports. In March, Dankner raised NIS 323 million, mostly from relatives, and the buyers since have lost more than half of the value of shares. Other options are bringing in an investor to IDB's controlling core, or a rights issue in which Dankner will inject capital, which depends on his personal financial circumstances.

If Dankner cannot solve IDB Holding's cash flow problem, and the company fails to meet its financial commitments and seeks a debt settlement, it will be a fairly straightforward one: its only asset is IDB Development, and if Dankner cannot inject capital into the company as part of a debt settlement, IDB Holding's bondholders will become its equity owners, and they will sell IDB Development for the highest price. The result is that Dankner will lose his company.

Published by Globes [online], Israel business news - www.globes-online.com - on August 29, 2012

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

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