Entropy: Oil price fall could force Delek Group debt settlement

Yitzhak Tshuva

Delek Grup has shed over 70% of its value since the beginning of the year.

Securities of Delek Group Ltd. (TASE: DLEKG), controlled by Yitzhak Tshuva, have been dealt another blow by the collapse of global oil prices and predictions of a debt settlement in the group. Delek Group's share price plunged 22% yesterday, following a 31% drop the previous day, and the company has now shed 72% of its value since the beginning of the year, driving its market cap down to NIS 1.8 billion. Tshuva's 65% stake in the group is now worth NIS 1 billion, lower than the presumed amount of its debt to the banking system in Israel. All of Tshuva's shares in Delek Group have been attached in favor of Bank Hapoalim since he acquired control of the company in 1998.

Delek Group's various bond series were down 15-34%, with the steepest fall being in the Series 31 bonds, amounting to NIS 3.1 billion and having a 2.7-year duration. The recent falls have reversed Delek Group's yield curve; the bonds with the shortest duration (Series 13, with a 0.54-year duration) are being traded at an annual yield to maturity of 81%, while the longer-term bonds (Series 34, with a 3.52-year duration) are being traded at a 24% yield to maturity.

Institutions out, hedge funds in?

Delek Group tried to soothe investors by voluntarily publishing its projected cash flow for the next six years. So far, however, this has not worked, because of concerns in the market about the working assumptions on which the projection was based. At least to judge from the capital market's behavior, Delek Group is already on a steep slope leading inevitably to a huge debt settlement.

Investment institutions are also starting to scale back their holdings in Delek Group's securities, and hedge funds specializing in high-risk debt are taking their place. These funds will be the first to press the company's board of directors to take various measures to protect their rights, including measures for raising capital and selling assets.

Sources inform "Globes" that research company Entropy distributed an economic analysis of Delek Group's ability to pay its debts to its customers among the investment institutions on Sunday. This study shows that Entropy believes that Delek Group will be able to meet its financial obligations in the coming quarters, but is concerned about the more distant future.

"The risk threatening it is a sustained decline in oil and gas prices, which is likely to cause holders of the long-term bond series to demand a halt in payments, and possibly even a debt settlement," writes Entropy analyst Ora Walach. "Current prices of the company's indicate that investors regard a debt settlement scenario as highly likely."

Walach adds that a change could occur in the near future if the trend reverses and oil and gas prices rise once again. Otherwise, it cannot be ruled out that raising capital, despite the especially difficult conditions (a fall of over 70% in the share price since the beginning of the year), or a sale of assets that will surprise the market will be necessary in order to halt the bonds' crash.

Walach goes on to write, "A continued slide in oil and gas prices, without an injection of capital, is liable to bring a debt settlement very close." Walach wrote his comments before the latest fall in oil prices.

Will Delek Group receive the dividends it needs?

Delek Group has reinvented itself over the past year, assuming greater exposure to energy and fuel. Its three main activities currently consist of its holdings in Ithaca, Delek Drilling, and Delek Israel.

Ithaca is involved in oil production in the North Sea, while Delek Drilling is active in the natural gas sector through holdings in gas reservoirs in the Mediterranean Sea. Delek Israel works in the Israeli fuel market, which is highly competitive, with low profit margins.

Over the past year, Delek Group has sold its holdings in insurance company Phoenix and vehicle importer Delek Motors for NIS 2 billion. Delek Group, however, invested much of these proceeds in Ithaca, which purchased active oil fields in the North Sea from US company Chevron for $1.7 billion.

The ability of Delek Group to repay its debts in the future therefore rests on the dividends that it receives from its two main holdings: Ithaca and Delek Drilling. According to the projected cash flow report by Delek Group, its aggregate debt payments up until 2025 (principal and interest) to the banks and its bondholders total NIS 9.23 billion.

The company also says that it will have to make additional payments totaling NIS 640 million, bringing its total payments in the next six years to the huge sum of NIS 9.87 billion. The company assumes that it will be able to pay this debt using the NIS 1.34 billion in cash it had at the beginning of 2020, dividends from its held companies, proceeds from the sale of other assets, and various financing deals.

Only five weeks ago, Delek Group held a large investors conference, at which it set forth its plans. Delek Group's managers, headed by new CEO Idan Wallace, tried to instill optimism among investors and strong confidence in the company's ability to carry out its growth plans. It now appears, however, that the capital market does not share this feeling, and that its view of the company is entirely different.

Published by Globes, Israel business news - en.globes.co.il - on March 10, 2020

© Copyright of Globes Publisher Itonut (1983) Ltd. 2020

Yitzhak Tshuva
Yitzhak Tshuva
Twitter Facebook Linkedin RSS Newsletters גלובס Israel Business Conference 2018