Delek decline continues, S&P rating unchanged

Yitzhak Tshuva

Delek Group's share price is down 35% since the Chevron deal, and its bonds yields are up to 8%.

The share price of Delek Group Ltd. (TASE: DLEKG) is continuing its downward path today, shedding another 1%, and has now dropped 35% since the company announced its mammoth deal for acquiring the North Sea oil production assets of Chevron in late May through its Ithaca subsidiary. Delek Group's share is now at a five-year low, with its market cap plunging to NIS 4.9 billion.

At the same time, the company's bond series have also been losing ground in recent weeks, with yields on five-year LD and 3.25-year LA shekel bonds soaring to 8%.

Despite the steep decline in the company's share price and bonds in recent weeks and months, economists of rating company S&P Maalot retained their A credit rating for Delek Group, controlled by Yitzhak Tshuva, with a stable outlook. S&P Maalot said that Delek Group had a suitable liquidity profile at the holding companies level, and that the company's leverage ratio would fall when the sale of Phoenix and the $1.6 billion Ithaca-Chevron deal are completed. S&P Maalot believes that the deal will bolster the value of Ithaca's assets and reduce the group's debt by NIS 1 billion ($300 million) as a result of the elimination of Delek Group's guarantees for Ithaca's debt when the deal is completed.

Delek Group's current loan-to-value (LTV) ratio is high at 55%. The recent decline in the market value of the group's marketable assets has had a negative impact on this ratio. S&P Maalot, however, writes, "This ratio will drop to 45-50% when the sale of Phoenix and the Ithaca-Chevron deals are completed."

The rating company predicts that Delek will distribute a NIS 400 million annual dividend in 2019-2020 and that the group's its entire (extended solo) debt will drop to NIS 6 billion by the end of 2020, including guarantees, bank loans, and bonds, "an assumption that it consistent with the group's commitment to reducing its leverage."

Assessment: Delek Group will not issue debt in the coming year

S&P Maalot's economists predict that Delek Group will benefit from a regular dividend flow, natural gas royalties, and management fees of NIS 600 million a year in 2019-2020. Delek Group will also receive NIS 1.3 billion from the sale of Phoenix by the end of 2019, bring in strategic partners as capital investors in the Ithaca-Chevron deal to the tune of NIS 1 billion ($280 million), and refrain from any further debt issues over the coming year. If any of these factors fails to materialize, the result will be a downgrade in Delek Group's rating.

In addition to these risks, S&P Maalot's economists also mention that the company has high exposure to the relatively risky energy sector. It has little geographic spread in its asset portfolio, with a focus on the Israeli market and North Sea assets, its leverage is rather high, and it has does not regularly distribute dividends.

Early this week, Delek Group, which needs $450 million to complete its acquisition of Chevron's North Sea oil assets, reported that it had received a signed offer from an international trading firm for an investment in Ithaca.

According to the report, the trading firm offered to invest $100 million in equity in Ithaca's parent company, which is fully owned by Delek Group in exchange for an allocation of preferred shares with a guaranteed dividend return. These shares will, be automatically converted into 4% of the company's ordinary shares when Ithaca makes a share offering.

In addition, the offer also includes contracting five-year oil and gas marketing agreements with the trading firm, with a $150 million advance on future sales, to be used to finance Ithaca's working capital. Delek Group later announced that the parties had signed a non-binding memorandum of understanding, and that the company was continuing negotiations with additional potential investors.

Published by Globes, Israel business news - en.globes.co.il - on September 26, 2019

© Copyright of Globes Publisher Itonut (1983) Ltd. 2019

Yitzhak Tshuva
Yitzhak Tshuva
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