Argentinean Jewish businessman Eduardo Elsztain has again reached a watershed in his investment in Israel. After finally abandoning his plan to obtain control of Clal Insurance yesterday, he must now find a new way out from the difficult state of his business in Israel.
Elsztain controls the IDB Development-Discount Investment Corporation holding group, which he took over as part of the debt settlement of its former parent company, IDB Holdings, a company that collapsed together with its controlling shareholder, Nochi Dankner. Elsztain has since injected NIS 2.7 billion into IDB Development and Discount Investment, mainly through IRSA, a company under his control listed on the New York Stock Exchange (NYSE) and the Buenos Aires Stock Exchange.
The large sums that Elsztain and his IRSA partners injected were not enough, however, to cover the mountain of debt left by Dankner, and the group is now again in a state of great uncertainty. This is particularly true for IDB Development, of which the S&P Maalot rating company recently wrote, "The risk of insolvency or a debt arrangement in the company in the next six months has increased."
IDB Development owes NIS 2.72 billion to its bondholders. In November 2019, the company is due to repay two of its four bond series, Series 11 and Series 13, in full. IDB's remaining holdings in Clal Insurance are attached to secure this debt. The principal due on the bonds amounts to NIS 479 million, while the attached Clal Insurance shares have a current value of NIS 660 million.
S&P Maalot says that IDB Development's repayment capability in effect depends on the completion of important measures that will provide the company with sources of liquidity, and on the sale of its shares in Clal Insurance. At the same time, because IDB Development's loan-to-value (LTV) ratio is over 100%, meaning that its debt is greater than the value of its assets, S&P Maalot believes that IDB Development will have to halt payments in the next six months due to the priority of its creditors.
If this occurs, IDB Development will sink into chaos, because its leaders will have to contend with four different bond series with different guarantees, different demands, and different interests. Holders of each series of bonds can also choose to act separately through representatives and advisors (legal and economic). This makes negotiations with the bondholders of the four series more challenging for the company.
For this reason, the trustee and the representatives and advisors of each of the four bond series will have to consider well the general consequences of their demands and measures vis-à-vis IDB Development. On the other hand, Elsztain and IDB Development will have to find and present quick solutions that will prevent escalation in the situation and a tailspin reaching a point of no return for them. The following are several possible scenarios in the IDB group in the coming months, in which a debt arrangement appears almost inevitable.
Scenario 1: Another injection by Elsztain
IDB Development has been close to bankruptcy in recent months, after reporting a 117% LTV and a negative NIS 324 million net asset value (NAV) at the end of March. In the current circumstances, there is one obvious way for IDB Development to remain outside the creditors' danger range - another capital injection into the company.
Elsztain's IRSA, which had a $595 million market cap on NYSE at the end of last week, has already injected $640 million into IDB Development over the years. Nevertheless, in order to avoid having its entire investment wiped out, IRSA is liable to find itself having to inject $50-150 million in capital.
Elsztain has thus far shown no real desire to inject more capital into IDB Development, and it cannot be ruled out that his agreement to make such an injection will be accompanied by a counter demand for a rescheduling of the debt to the bondholders, or even for writing off some of the debt. In other words, another capital injection is possible, but is likely to come as part of a second debt arrangement in the IDB group.
Scenario 2: An injection through a partner
There is another possible way to obtain new capital for IDB Development - by recruiting a partner. It is difficult, however, to envisage any party wanting a partnership in IDB Development - a holding company in the process of selling its holdings in order to pay its debts. It is therefore more likely that if Elsztain manages to find a partner for his investments in Israel, it will be through an investor injecting capital into Dolphin IL, through which Elsztain controls Discount Investment, and the investment money will be transferred from it to IDB Development in order to repay debt.
Discount Investment, however, has a market cap of only NIS 940 million and reported an NAV of NIS 1.2 billion. Only finding an investor who will agree to inject capital at a substantial premium on these amounts is a realistic possibility for Elsztain, who will find it difficult to unload his main asserts at their current values.
Scenario 3: Reliance on luck and the bondholders
In addition to its two short-term bond series (Series 11 and 13), IDB Development has two other longer-term bond series (9 and 14). Series 14, amounting to NIS 993 million, is backed by a lien on the controlling shares in Discount Investment, which were sold to Elsztain's Dolphin IL, and a lien on the payments resulting from those shares. Series 9, amounting to NIS 1.24 billion, is not secured by any other guarantees whatsoever.
The holders of these two bond series will shortly face a difficult decision: whether to allow repayment of the two short-term bond series in November, or to try to prevent it beforehand. As of now, it is difficult to predict what the holders of each bond series will decide. In view of the relatively strong guarantees for the short-term bond series, however, it is likely that they will eventually be repaid.
In this situation, IDB Development and Elsztain will be able to negotiate a debt arrangement with holders of the long-term bond series only, with no real time pressure. In this situation, the controlling shareholder will have a substantial period of tranquility in which to find a solution for his plight.
During this period, IDB Development can try to complete the sales of Israir, sell half of its holdings in its commercial and office real estate project in Las Vegas, continue the sale of its holdings in Clal Insurance, and possibly benefit from a renewed improvement in the state of Discount Investment's business.
Scenario 4: The bondholders do not conform to expectations
There is, however, another possibility: that the holders of Series 9 and Series 14 bond decide to try to prevent repayment of the short-term bond series by threatening IDB Development's board of directors and petitioning the court. These actions will put IDB Development into a rapid tailspin, with unpredictable results.
Published by Globes, Israel business news - en.globes.co.il - on July 22, 2019
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