In early November 2015, Canadian real estate company Urbancorp published a first prospectus for raising money from the Israeli public through a bond offering. A month later, the company completed the raising of NIS 180 million, and its Series A bonds started to be traded on the Tel Aviv Stock Exchange. However, a series of events, raising questions and fears concerning the quality of corporate governance at the company, reached a climax today and sent the bond price tumbling 41% to a low of NIS 0.56. This price gives an annual yield to redemption of 39%, and reflects a high probability that the company will not be able to meet the bond repayments in full.
Urbancorp was brought to Israel by underwriting firm Apex Issuances, run by Aharon Samra and Eliav Bar-David, with a promise that the company, controlled by Alan Saskin, was "one of the ten most active and largest real estate developers in Canada." The underwriters presented Saskin as "one of the leading real estate developers in Toronto and one of the chief figures in the real estate investment community, who combines urban development and community empowerment with culture and art."
Since then, however, it has emerged that the reality is different from the way it was presented. Promises that Saskin made to the company and the underwriters have not been fully kept, and Urbancorp's position has deteriorated rapidly. In a notice to the Tel Aviv Stock Exchange today by law firm Shimonov & Co. on behalf of Saskin and Urbancorp, a series of untoward events is reported, among them the announcement by Shimonov that a week ago it handed Saskin its resignation from representing the company in Israel because of "unresolved differences of opinion". The letter states that "the resignation of the legal counsel delayed the receipt of the required legal advice."
Urbancorp was sold to investors in Israel as a company that builds housing for sale and rent, and also builds and operates geothermic systems that serve the residential buildings. In its notice today, the company also reported that the members of its financial reporting committee sought to defer approval of the financial reports because of the need to examine whether financial moves by Saskin, who is both chairman and CEO, represent a breach of an undertaking in the prospectus and whether all the necessary approvals had been obtained for transactions carried out between Saskin and the company.
Saskin undertook in the prospectus that immediately after the bond offering he would transfer to the issuing company real estate projects under construction, both residential and income producing assets, and that he would inject CA$12 million into the company in cash. On January 2, 2016, Urbancorp announced, through Shimonov, that in accordance with the undertaking in the prospectus "On December 31, 2015, Mr. Alan Saskin, the controlling shareholder in the company, through a company he wholly owns, made available an owner's contribution amounting to the sum of twelve million Canadian dollars to the company's capital."
However, last month it emerged that the picture was more complicated. The owner's contribution was transferred in January after Saskin took a loan against it, mortgaged assets he owned in favor of a bank, and agreed to the imposition of restrictions on the use of the money and to give joint signatory rights to the bank on the account to which the money was transferred. Two months later, Saskin entered into a further transaction with the bank whereby the previous loan of CA$12 million was reduced to just CA$10 million, with the same assets being mortgaged to secure it. The bank that lent Saskin the money is the same Canadian bank that received almost 60% of the bond offering proceeds as repayment of a mezzanine loan at over 10% interest that it granted the company.
Another matter on account of which the financial reporting committee required the financial statements to be deferred was the need to examine the effect of the deal to acquire half of the Fuzion geothermic project on the value of the company's other geothermic assets as presented in the balance sheet. This was a deal in which Urbancorp agreed to buy the other half of the shares in Fuzion for CA$ 2.35 million from its partner in the ownership of the project, First Capital, controlled by Gazit-Globe Ltd. (NYSE: GZT; TASE: GLOB). The deal was carried out through a seller's loan of CA$2 million, and was meant to assist in generating immediate cash flow.
Saskin's company has also been asked to report officially to the stock exchange about a letter received at its offices on March 4 in which the government of the province of Ontario, through government body Tarion Warranty Corporation, refuses to renew the company's registration with Tarion, Ontario's new home warranty insurer. Tarion claims that Urbancorp has not met its obligations to complete projects without unjustifiable delays and has not provided satisfactory answers about its financial position. Urbancorp says it has appealed against Tarion's decision and that it has been advised by its Canadian lawyers that the dispute can be resolved by agreement within a short time. Meanwhile, it can only proceed with existing approved projects.
The company also stated that this morning a petition was filed to bring against it, its directors and the bond trustee, a class action for the failure to fulfil the duty to report concerning the controlling shareholder's undertaking to inject CA$12 million into the company and the notice from Tarion. The monetary damage is estimated by the complainant at NIS 23 million, but in the light of the collapse of the bond price today, this sum will probably grow substantially.
Published by Globes [online], Israel business news - www.globes-online.com - on April 4, 2016
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