The Israel Securities Authority (ISA) investigation revealed on Tuesday, in which Nochi Dankner, controlling shareholder and chairman of IDB Holding Corp. Ltd. (TASE:IDBH), is suspected of fraudulent activity in the fundraising round held by the company in February, was evidently the last straw for its bondholders, to whom IDB owes NIS 1.8 billion.
If up to now the market awarded a premium to IDB's bonds, because of the view that Dankner would succeed in bringing in investors who would inject new money into the company, then, at least judging from today's trading, the ISA investigation has substantially reduced the likelihood of that happening.
IDB Holding's bonds fell sharply today, and the "circuit breaker" was operated frequently for these securities, because of the strength of the decline. IDB Holding bonds have fallen 14.9-18.5%, and are traded at NIS 0.21-0.34, giving a range of yields of 75-390%. The company's share price fell 10.2% yesterday, making it a fall of 18.5% in two days.
In less than a month from now, IDB has to pay NIS 65 million interest to holders of its D bond. Bonds in this series represent about 75% of IDB's total bond debt. The company itself wants to make the interest payment out of its own cash, which amounts to NIS 200 million.
The representative body of the bondholders, comprising Psagot, Excellence, Harel, and Gilad funds, wants the interest payment to be made through an injection of external capital, just as happened in the case of the holders of the B series bond. The principal repayment, which should have taken place in September, was recently transferred to these bondholders, following the completion of a NIS 41 million rights issue by IDB.
Most of the money was raised from Ganden, the company via which Dankner controls IDB, after Eduardo Elsztain invested $25 million in Ganden in September in return for 10% of the company. Elsztain also received an option to invest a further $75 million.
In order for the interest payment to be paid once more from the proceeds of a rights issue, Elsztain has to exercise the option, and to receive approval from the Commissioner of Insurance at the Ministry of Finance to do so, because of IDB's stake in Clal Insurance Enterprises Holdings Ltd. (TASE: CLIS). After the investment, if it takes place, Dankner will need to reach agreement with the banks on the amount he will devolve onto IDB Holding, since Ganden itself has debts of more than NIS 500,000 to Bank Leumi (TASE: LUMI) and Mizrahi Tefahot Bank (TASE:MZTF).
Since this process (if it occurs) will take more than a month, at best, IDB Holding will not manage to pay its debt this way in time. The company has therefore made an interesting proposal to the bondholders: since the D series, on which the forthcoming interest payment in due to be made, represents 75% of the total debt to the bondholders, a sum of money will be made available for the other series, that represent 25% of the debt, amounting to a quarter of the payment to the D series holders.
That way, the claim by the other bondholders of preferential treatment of creditors is negated, since they receive their share of the company's cash, the same situation that would obtain of the company were to go into liquidation.
The bondholders representative body is refusing IDB's proposal, and is adhering to two possibilities: either an increase in the company's equity through a cash injection by Dankner or someone on his behalf, which would give the company breathing room, or negotiations on a debt settlement. In the second scenario, if Ganden or Dankner do not come up with new capital, the bondholders will take over control of IDB.
A battle is taking place between the bondholder representatives and IDB management which has even spilled over onto the personal level, with the representative body attacking Dankner's business conduct, after IDB asked the bond trustees to investigate conflicts of interest among members of the representative body, particularly Psagot, which has been Dankner's most vociferous critic.
DB does not wish to enter into negotiations on a debt settlement, as that would be liable to signal that it could not meet its commitments and was insolvent, when it has enough cash to service its debt until June 2013.
As things stand, it appears that that there will no avoiding resort to the court to decide the matter. Seeing that IDB intends to make the interest payment from its cash in due course, today, the trustees summoned a meeting of bondholders (other than holders of the D series) for Sunday. The trustees will ask the bondholders for their agreement to an application for an injunction preventing the forthcoming interest payment from being made from IDB's cash, and even to instituting insolvency procedures.
The trustees also seek to set a date by which IDB must meet the following conditions: receipt of written undertakings from the controlling shareholder, or a third party, that the interest payment will be made by the end of January 2103 from external sources; and receipt of an undertaking that at least NIS 200 million of Elsztain's future investment (about 70% of the money Ganden is due to receive if the option in exercised) will be injected into IDB. The trustees are also demanding that a memorandum should be signed on the outline of a settlement between the representative body, the company, and the controlling shareholder. In the light of this, it looks as though the fate of the largest holding company in the Israeli economy will rest with the court.
IDB Holding has a deficit on shareholders' equity of NIS 1.7 billion, and in the wake of the huge losses that the group has accumulated in the past two years, it has a negative amount available for distribution of some NIS 3 billion.
Published by Globes [online], Israel business news - www.globes-online.com - on November 29, 2012
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