The sword hanging over IDB Development's neck was removed at the end of last week, temporarily at least. Controlling shareholder Eduardo Elsztain agreed on Friday to inject a further NIS 210 million into the company over the next two years, thereby averting the threat of a "going concern" qualification in the auditor's report on its financial statements.
On Friday, IRSA, which Elsztain controls, announced that, through its wholly owned subsidiary Dolphin Fund Ltd., it would inject NIS 70 million into IDB Development today (Monday), and would make two further payments in the same amount in September 2020 and September 2021. These cash injections are in addition to the huge sum of NIS 2.7 billion that Elsztain has already injected into the IDB Development-Discount Investment group through companies under his control since he acquired control o the group in May 2014.
IDB Development said that the funds would be in exchange for an allocation of shares in the company or a deferred loan on terms similar to those of subordinated owner's loans it had received from Dolphin Fund in the past. IDB Development also said that if it did not obtain the cash resources needed for awarding Eyal Lapidot the seller's loan agreed in the deal for the sale to him of 4.99% of Clal Insurance Enterprises Holdings Ltd. (TASE: CLIS), it would have the right to demand the early transfer of NIS 40 million on account of the second cash injection. IDB Development undertook to give Lapidot a seller's loan of NIS 118 million to finance the NIS 132 million sale of the shares.
IDB Development is also shortly due to complete the sale of a further 3% of Clal Insurance to Mori Arkin for NIS 83 million, after selling him a 4.99% stake in the insurance company in May for NIS 132 million. Before the sales to Arkin and Lapidot, IDB Development held 20.3% of Clal Insurance, and it is exposed to a further 24% of Clal Insurance's shares through swap deals with its banks, and that it can channel to new buyers.
IDB Development also released its second quarter financials, showing a NIS 76 million net profit thanks to a rise in the value of its holding in Clal Insurance. Since the end of June, however, Clal Insurance's share price has fallen by about 13%, cutting the value of IDB Development's holding by some NIS 162 million.
Against liabilities to its bondholders totaling (in principle terms) NIS 1.92 billion, IDB Development has assets and collateral with a present value of just NIS 1.07 billion. The company had thought to remedy this situation by swapping long-term bonds of its 9 and 14 series for shares in Clal Insurance, at a substantial discount in relation to the adjusted value of the bonds.
Last week, the IDB Development board of directors received a proposal from a group of underwriters for the sale of up to 26% of Clal Insurance in exchange for cash or 9 and 14 series bonds. The board is due to respond to the proposal today, but according to the company's cash flow forecast in its financial statements, it appears that only 5% of the shares in Clal Insurance will be swapped for long-term bonds.
The reason for this is the large repayments that IDB Development is due to make this November, which oblige it to obtain more cash, by selling shares in Clal Insurance or through a cash injection far larger than that to which IRSA has committed. Therefore, so long as IRSA does not expand its cash injection, any swap of Clal Insurance shares for bonds will be of limited scope.
Published by Globes, Israel business news - en.globes.co.il - on September 2, 2019
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