On Sunday this week, something happened on the local capital market: the quarterly financials of Delek Group Ltd. (TASE: DLEKG), until recently one of the most valuable and stable companies on the Tel Aviv Stock exchange, had a "going concern" qualification appended to them by the company's auditors. This represents a dramatic warning that the company might not be able to meet its short-term commitments. If as a result it is forced into liquidation, its assets will be worth much less than the values at which they are stated in its reports, which are prepared on the assumption that it is a going concern that will continue in business.
The qualification amounts to an official confirmation of the gloomy financial position of the energy company controlled by Yitzhak Tshuva, already manifest in the 70% collapse of its share price since the beginning of the year and the junk yields at which its bonds (debt of NIS 6 billion) are currently traded.
There is considerable doubt whether Delek Group's financial state can possibly recover, given the lows reached by oil prices because of the coronavirus pandemic, which has depressed demand for oil.
Delek, however, is not alone. Many other listed companies are expected to find it hard under present conditions to recycle their debts, and as a result will have difficulty in meeting payment to their creditors. Several bear going concern qualifications in the auditors' reports on their financial statements, some of them with huge debts to bondholders. All in all, more than 40 companies, about 10% of those listed on the Tel Aviv Stock Exchange, have going concern qualifications in their 2019 reports. Some of them had been in a challenging financial situation for some time, and then the coronavirus came along and threatened finally to topple them and bring them to a debt settlement. Others were enjoying stable business activity before the virus turned their worlds upside down.
Apart from Delek Group, the companies arousing most concern among investors, mainly because of their high levels of debt to the public, are IDB Development, overseas real estate companies Related Commercial Portfolio and Starwood West, and real estate and infrastructure company Kardan NV, all of them at one stage or another of talks with their bondholders. The aggregate bond debt of these five companies alone is over NIS 10 billion.
At Delek Group, the collapse of the price of oil set off a chain reaction of a fall in the value of its assets, failure to abide by financial covenants, demands for immediate repayment of part of its commitments, a credit rating downgrade, a shareholders' equity deficit, and court hearings. All these things threaten Delek Group's ability to meet its commitments, and have led it to enter into negotiations with its bondholders and its lender banks.
Accordingly, the company's auditors direct investors' attention to the fact that completion of the company's plans "is not within its sole control, and depends on, among other things, realization of assets and the receipt of dividends from subsidiary companies, and in particular the formulation of binding agreements with the bondholders and the financial institutions which… have not yet been formulated."
The auditors conclude that the many uncertainties "raise significant doubts about the company's continued existence as a going concern."
IDB Development
At the IDB Development group, controlled by Eduardo Elsztain, a going concern qualification was appended to its annual report when, until the coronavirus crisis broke out, the company had managed to maneuver in a challenging financial situation and avoid such a qualification. Commenting on the effect of the coronavirus crisis, IDB Development mentions the acute damage to the activity of tourism unit Israir, with a dramatic drop in bookings and flights, and a blow to its possible sale as well. The crisis has also hit the market value of its listed subsidiaries, mainly Discount Investment.
IDB's auditors point to the company's cash flow, its shareholders' equity deficit, its negative net asset value on the basis of current market prices, its cash needs, and the effect of all these on its ability to service its debt, including bond debt of NIS 2 billion.
The auditors also call attention to IDB's dependence on factors beyond its control, which "raises significant doubts about its continued existence as a going concern."
IDB Development has already begun to prepare for a debt settlement, which will be the second since Elsztain took control, in an investment that so far has cost him some NIS 3 billion.
The third largest company in terms of bond debt in doubt, amounting to NIS 1.3 billion, and that carries a going concern qualification on its reports, is Kardan NV.
Unfortunately for investors in Kardan NV, such a qualification has been a fixture in its reports for a long time, and its negotiations with its bondholders have been going on since late 2017. Despite this, the company still states in its latest report that "the company cannot estimate when it will reach a settlement with the bondholders."
Kardan NV is active in real estate in China and in water infrastructures through its subsidiary Tahal. Kardan NV states in its report that the coronavirus outbreak "had an adverse effect on the results of Kardan Land China in the first quarter of 2020 and also adversely affected the results of Tahal." Tahal has been for sale for a long time, but a sale has become unlikely because of the deterioration in its business situation.
US real estate companies
Fourth in the list of companies mentioned above is real estate company Starwood West, which has been directly affected by the pandemic, which led to the closure of its malls in the US.
The company, controlled by Barry Sternlicht, which faces a debt settlement amounting to some NIS 1 billion, states in its financials released last week that its assets are still closed "and there is no certainty about when they will open." The company adds that it is unable to estimate the extent of the effects of the crisis, but that it believes that "it will have a material adverse effect on the company's activity and results."
The company's auditors point out that it has insufficient cash to repay the balance of the bonds issued in March 2018, and that it has not met the repayments on its main loan (Southlake).
Another US real estate company with substantial debt to investors in Tel Aviv, amounting to nearly NIS 700 million, is Related Commercial Portfolio, which recently published a surprising going concern qualification in its reports. Related, controlled by Stephen Ross, focuses on commercial and residential real estate in New York and Chicago.
In its report, Related states that the coronavirus crisis "is liable to impact the company's revenue because of a possible slowdown in demand and harm to the businesses of various tenants, which will be liable to cause a decline in cash flow from regular activity, and also a decline in occupancy and a possible fall in prices or loss of value in the company's real estate assets."
Related's auditors draw attention to a $127 million working capital deficit and to that fact that as a result of "a combination of the working capital deficit and the possible effect on the capital and debt market of the Covid-19 crisis, the company's management recognizes that there exists uncertainty over the company's ability to refinance the bonds that are due to be redeemed on September 20, 2020."
The auditors add that the market situation is liable to affect Related's ability to realize assets and pay commitments in the ordinary course of business, and therefore "there are significant doubts about the company's continued existence as a going concern."
Published by Globes, Israel business news - en.globes.co.il - on May 5, 2020
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