The upsets in the financial markets in the past few weeks have increased the negative pressure on the corporate debt market in Tel Aviv. Within three months, the amount of corporate bond debt traded at double-digit yields has risen by more than 37% to NIS 25 billion, raising fears of a credit squeeze and growing difficulties in raising and recycling debt on the part of listed companies.
This not very prestigious club of companies with bonds traded at junk yields, which for some time has included Chaim Katzman’s income-producing real estate companies G City and Norstar and real estate developer Hanan Mor, was recently joined by Discount Investment Corporation, against a background of its publicly traded holdings rapidly losing value and a challenging debt repayment schedule for the coming years.
These yields indicate a rise in the level of risk that investors attribute to the companies, blocking access to recycling of debt on the market. Discount Investment’s three series of bonds, amounting to an aggregate NIS 2.2 billion, are currently traded at yields of 12-14%. In the absence of any possibility of recycling the debt, the company will have to find other ways of raising the money required to meet its commitments.
Discount Investment is a holding company without a controlling interest. Just over two years ago, a consortium of investors headed by Tzahi Nahmias’s income producing real estate company Mega Or won an auction of the 82% controlling stake in the company by the receiver of IDB, beating the bid of the former controlling shareholder in IDB and Discount Investment Eduardo Elsztain.
The buyers were considered an all-star business group. Besides Nahmias, who serves as chairman of the company, it consisted of the Salkind brothers’ Elco, which like Mega Or holds 30% of Discount Investment, retailing and aviation magnate Rami Levy (11%), and Chen Lamdan (5%).
The group paid a total of NIS 1.1 billion for the shares in Discount Investment, which now looks like a failed investment, giving a paper loss of over 50%. Discount Investment, headed by Nataly Mishan-Zakai, currently has a market cap of just NIS 636 million, after a 60% drop in its share price in the past year.
Against the threatening bond debt, Discount Investment holds the controlling interest (63%) in Property & Building, which controls income-producing real estate company Gav Yam Lands Corp. (Bayside), and a controlling stake (36%) in telecommunications company Cellcom. It also controls agricultural produce company Mehadrin and technology holdings company Elron.
As mentioned, investors are concerned at the rapid fall in the value of Discount Investment’s assets in the past few months, driven partly by the rise in interest rates. The value of Discount Investment’s stake in Property & Building has fallen by 45% in the past six months, and now stands at NIS 764 million, about half of its value at the end of the third quarter of last year.
Towards the end of February, Property & Building reported that talks on the sale of the HSBC Tower in New York had terminated without agreement being reached. The valuation of the office tower, one of the company’s main assets, has gradually eroded, falling from $855 million at the end of 2021 to $720 million at the end of the third quarter of last year.
The value of Discount Investment’s holding in Cellcom has also fallen in the past few months, to NIS 795 million, almost 30% below its value at the end of the third quarter of 2022. In January, Discount Investment reported that it had hired the services of Barclays Bank to revive the process of selling control of Cellcom, after the failure of the move last summer. At any rate, Discount Investment estimates that Cellcom’s current market cap of NIS 2.1 billion is far from reflecting the company’s economic value.
NIS 677 million bond debt for repayment this year
At the end of the third quarter of 2022, Discount Investment’s gross debt totaled NIS 2.9 billion. Its liquid balances stood at NIS 1.1 billion, and it has a challenging repayment schedule in the coming years. In 2023, the company is due to make repayments to bondholders to the tune of NIS 677 million. NIS 650 million is due for repayment in 2024, and NIS 623 million in 2025.
The heavy debt weighing on the company and the rapid erosion of the value of its traded assets appear to narrow its room for maneuver. Realizing assets, which was supposed to lighten the debt burden, has become more difficult in current market circumstances, which is putting pressure on the prices of the bonds.
At the end of the third quarter of 2022, the value of Discount Investment’s traded assets was NIS 3.1 billion. Since then, their value has been cut by about a third, bringing the current total to below NIS 2 billion. Discount Investment’s net asset value, which at the end of September last year was NIS 1.2 billion, is now just NIS 200 million.
The change for the worse in Discount Investment’s financial position is liable to lead to a downgrade of its credit rating. S&P Maalot currently rates the company’s debt BBB, and the latest report, in May 2022, gave a "Stable" outlook. That report did however state that a worsening in the company’s liquidity position or limited access to the capital market or to bank credit could lead to a rating downgrade.
Sources close to the company, which is due to release its 2022 financials shortly, say that, despite the falls in the market, it has enough liquid sources to get through the coming year, in the hope that during that time the value of its traded assets will recover.
Published by Globes, Israel business news - en.globes.co.il - on March 21, 2023.
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