Lev Leviev still heavily leveraged

Four years after Africa-Israel's debt settlement, the company's future is still in the balance.

In December 2008, shortly after the outbreak of the global financial crisis, the Israel Securities Authority published Amendment 2 to the Securities Regulations, which requires companies that issue bonds to the public must disclose their cash flow forecasts for the next two years. The Securities Authority sought to protect the public by creating a mechanism to allow it to assess a company's ability to repay its bond debt.

Following the new regulation, in May 2009, Africa-Israel Investments Ltd. (TASE:AFIL), controlled by chairman Lev Leviev, published its cash flow forecast as part of its financial report for the first quarter. According to the forecast, the company planned to repay bondholders NIS 2.4 billion through the end of 2011, mostly from two sources: dividends from subsidiaries and the sale of assets and activities.

The forecast did not pan out, and before the ink was dry on the financial report, in August, Africa-Israel announced that it wanted to enter into negotiations on a debt settlement. The settlement would be largest in the Israeli capital market until that time, and was a ringing slap in the face to the people who believed in the company's forecasts from just three months before.

Africa-Israel's bond debt at the time was NIS 7.4 billion. The company repaid NIS 500 million early, and cancelled the balance of the debt through the issue of new bonds, totaling NIS 4.6 billion, and equity allotments in the company and subsidiaries Africa-Israel Properties Ltd. (TASE: AFPR) and AFI Development plc (LSE:AFID). Since the settlement, Africa-Israel's share price has fallen 80%.

In late August 2013, investors were reminded of the abovementioned events, when Africa-Israel published its financial report for the second quarter. Despite converting 30% of its debt to equity four years earlier, the company's debt burden is still very heavy. The cash flow forecasts stated that the company must repay NIS 1.14 billion, 42% of its financial debt of NIS 2.7 billion, through June 2015, and that it was planning the development of new projects. Most of the repayments in the next two years are to bondholders. As before, the main sources for the repayments are two imprecise sources: "sources from subsidiaries" and "the sale of shares and properties".

In 2009, Africa-Israel's forecasts to investors about these two sources turned out to be incorrect, so it is natural to ask whether, this time too, Leviev will have to seek a new debt settlement and rescheduling of payments.

In Africa-Israel's favor, it should be noted that since the debt settlement came into force in May 2010, it has met its commitments to its bondholders in full, and that Leviev has injected into the company the substantial sum of NIS 610 million out of the NIS 750 million he promised as part of the debt settlement.

In addition, in January 2013, Africa-Israel carried out a swap of bonds with a par value of NIS 1.5 billion and made an early repayment of NIS 290 million. The company has also been actively selling assets to obtain the sources to finance its debt. In view of the insolvency at quite a few public companies lately, the conduct of Africa-Israel and its owners indicate a willingness to meet the tight bond repayment timetable.

However, in late August, remarks by Africa-Israel CEO Avraham Novogrocki to "Globes" imply that the danger is not past. "The company is burdened by a bond debt that requires payments of more than NIS 500 million a year, in addition to more than NIS 400 million in financing expenses," he said. "These are substantial amounts, and we must work harder to meet them in the short and long term. We have the wherewithal to pay, but it's not easy. We are dealing with this every day, so that the bondholders receive what they are owed."

To this comment should be added the numbers in Africa-Israel's financial report for the second quarter: the cash flow forecast states that it must repay NIS 1.14 billion in debt through June 2015, and NIS 1.1 billion in accumulated losses from January 2012 through June 2013.

This is a major financial challenge. To repay the bonds on time, Africa-Israel will have to make profits from its projects under development, even as it continues to develop new projects, which require additional credit.

IBI Investment House analyst Shai Azar lists the transactions underpinning the numbers in Africa-Israel's cash flow forecast, and says that it has a good chance of making the repayments through the end of 2014. He says that the company's sources are NIS 40 million from the dividend that construction subsidiary Danya Cebus Ltd. (TASE: DNYA) has already announced; NIS 12 million from the sale of the stake in Russian-language cable station Channel 9; and NIS 180 million from the sale of two properties in Los Angeles and Miami, on which due diligence is underway. The company also plans to raise NIS 331 million in a rights issue in 2014, out of which Leviev will invest NIS 174 million.

In addition, Africa-Israel's Russian development arm AFI Development has completed its 50,000-square meter Ozerkovskaya office complex in Moscow. On the basis of the deal in which AFI Development bought out its partner, the project is worth $400 million against which is a bank debt of $220 million.

Azar predicts that AFI Development will sell Ozerkovskaya in 2014, which will allow it to distribute a dividend of NIS 250 million to Africa-Israel, which will enable it meet its bond payments in full through 2014 and have a safety cushion for 2015.

A successful sale of the Ozerkovskaya project will give Africa-Israel breathing room, and enable it to recycle part of its bank debt and meet its bond payments without depending on the mercy of shareholders in the rights issue. Under the circumstances, Africa-Israel's bonds, which are currently traded at a yield of 12%, will show a capital gain.

But this scenario could also go the other way. There is no assurance that Africa-Israel's shareholders will convert the rights offered into equity (although they have done so until now), nor is there assurance that the sale of properties in the US will be closed after the due diligence is completed. Neither is there certainty about a successful sale of the Ozerkovskaya project.

"Africa-Israel's ability to repay its debt in 2014 primarily depends of the sale of Ozerkovskaya," says Azar. "If it does not sell, its wherewithal in 2014 is limited, and a problem could emerge in 2015."

Although Africa-Israel has quality assets, such as AFI Development's AFIMall in Moscow, which is filling up now, and AFI Europe NV's AFI Palace Cotrocini mall in Bucharest, they are not ready for sale. In addition, finding a buyer for such large properties in Eastern Europe is no small task either.

Africa-Israel is also developing large office complexes in Moscow: the 100,000-square meter Kosinskaya, the 80,000-square meter Tverskaya Plaza project, and the 8,000-unit Odinburg residential project. These are huge projects, which will unquestionably require additional credit inflows.

To sum up: Africa-Israel is a high-risk heavily-leveraged real estate development company. In the absence of guarantees, all its bondholders can do is cross their fingers.

Africa-Israel said in response, "The company does not comment on the transactions it is carrying out beyond the information provided the public in its financial reports."

Published by Globes [online], Israel business news - www.globes-online.com - on September 3, 2013

© Copyright of Globes Publisher Itonut (1983) Ltd. 2013

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