York Capital Management's aggressive purchases of IDB Development Corporation bonds have taken the capital market by surprise, and judging by investors' reactions, the surprise was pleasant. IDB Development bonds have risen by up to 50% since news of the purchases broke last week, indicating that the bondholders consider York Capital's investment in IDB as excellent news.
From conversations of York Capital representatives with Israeli investment institutions last week, it seems that the US private equity firm will not be satisfied with repayment of less than 75% of IDB's adjusted debt, and if that happens, the private equity firm will report a phenomenal return of over 50% on its investment, and a profit of hundreds of millions of shekels.
Besides the large profit that York Capital expects to report, it seems that the investment in IDB Development bonds - the first large investment by a foreign hedge fund in the Israeli corporate bond market - will also be good for the holders of the company's other securities. This is especially true for investment institutions, the managers of the public's savings, which have previously proved that they cannot be relied on when it comes to collecting on loans extended to tycoons' companies. Israel's investment institutions are deterred from confronting the heads of the large holding companies -with whom they have strong ties - while at the same time they are afraid for their public and media image.
The result is that they usually prefer to dump the goods on the market, chalking up losses for savers, rather than deal seriously with the repayment of debts, which is liable to turn into a public brawl, even if that is the way that might yield a higher return. The few investment institutions that remained in Delek Real Estate Ltd. (TASE: DLKR) or Tao Tsuot Ltd. (TASE: TAO-M) when the negotiations on debt settlements began, highlight this point well.
Even when investment institutions decide to be active versus debtor companies, they are usually divided, with each institution having its own agenda and interests. Frequently, the institutions face conflicts of interests as both bondholders and shareholders in debtor companies.
For all these reasons, it is a good thing for IDB Development's bondholders to be headed by a firm that owns almost a quarter of the company's public debt: a hedge fund dedicated to just one goal - maximizing the repayment of the bond debt. It is also good for the investment institutions to have a shepherd to lead them, a shepherd who is outside the Israeli capital market and has no sentiments other than profit.
The least bad alternative
But what about IDB Holding Corp. Ltd's. (TASE:IDBH) controlling shareholder? Should Nochi Dankner be pleased by York Capital's investment? Given the drop IDB Holding's bonds, the answer is no. It seems that investors in IDB Holding, through which Dankner controls IDB Development, suspect that they will be left with nothing from the expected sell-off of the subsidiary's assets.
York Capital is expected to act with determination, and with stubbornness, if necessary, against IDB's chiefs in order to collect the debt. Nonetheless, it is not certain that York Capital's investment is bad news for Dankner. The firm has already made it clear that it has no plans for a hostile takeover of IDB. As a rational investor, it is more logical for York Capital to give Dankner the time needed to sell IDB's holdings at as high a profit as possible, and time is the resource that Dankner needs most of all.
Even if Dankner is ultimately fated to lose control of IDB's assets to his bondholders, of the two alternatives - uncoordinated investment institutions and private investors whose moves are unpredictable, and a hedge fund determined to maximize its profits - it is possible that York Capital is better for Dankner.
Published by Globes [online], Israel business news - www.globes-online.com - on October 15, 2012
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