The board of directors of IDB Development, controlled by Eduardo Elsztain, is trying to avoid the attachment of a 'going concern' warning to its financial reports for the second quarter of 2019. The company today reported that it had asked its controlling shareholder, foreign company Irsa under Elsztain's control, for a commitment to inject at least NIS 140 million capital into IDB Development in stages.
IDB Development said that the capital injection was designed to strengthen its equity and bolster its net asset value (NAV). The company further stated that Irsa was asked to inject NIS 70 million of the requested sum immediately to fund a seller's loan that IDB Development undertook to grant as part of a deal for the sale of 4.99% of the shares in Clal Insurance Enterprises to Eyal Lapidot.
IDB Development also announced that it is currently conducting examinations in preparation for approval and publication of its second quarter financial statements, including the company's auditing accountant's need to draw attention to significant doubts about the company's continued existence as a going concern. IDB Development said that the auditor had notified the company that without an injection from its controlling shareholder, the upcoming financial report would probably include such a clause. IDB Development owes NIS 2.72 billion to its bondholders, and a going concern warning in its reports is likely to trigger a demand by them for immediate repayment of the debt.
IDB Development has less than a week left to publish its financial statements for the second quarter, and at the same time is being required to complete the sale of 5% more of its stake in Clal Insurance in the coming days, according to the schedule set by Capital Market, Insurance, and Savings Authority Commissioner Dr. Moshe Barkat.
Underwriters formulating offers to purchase for Clal Insurance
IDB Development today reported that it had contacted several concerns and told them to formulate binding and irrevocable offers to purchase shares in Clal Insurance. The proceeds will probably be paid in cash or in marketable securities according to the timetable set in the plan. Clal Insurance's share price was traded today around NIS 51, reflecting a company value of NIS 2.83 billion. The current value of a 5% package of shares is therefore NIS 142 million.
The bids that IDB Development will receive tomorrow should include three possible proceeds elements: cash, a certain amount of bonds from Series 14, and a certain amount of Series 9 bonds. Series 9 bonds are currently traded at NIS 0.69, reflected a 44% discount on their adjusted par value. This is form of proceeds preferred by IDB Development's board of directors. Market sources believe that the bidders will include in their offer a quantity of Series 9 bonds reflecting a price of NIS 0.80-0.90 per bond. At the same time, the bids are also likely to include a certain quantity of Series 14 bonds whose current price reflects a 30% discount on their par value.
At least two groups of underwriters have been formulating bids to acquire shares in Clal Insurance in recent days. The first group was composed of Leader and Barak Capital, while the second group was composed of Poalim IBI Management and Underwriting and Epsilon Underwriting and Issuing. Nevertheless, it cannot be ruled out that due to the complexity of the matter and the need for coordination for the trustees for the various bond series, these concerns are likely to submit a joint bid.
IDB Development stated in this context that if it itself buys bonds as part of the sale of shares in Clal Insurance, it would consider the possibility of making this purchase pro rata between the various unsecured bond series, including secured series for which the market value of the collateral for securing the debt is less than the balance of the debt. If the purchase of bonds is at a certain premium rate above the market value of the bonds, the company is also considering having the amount of the premium injected into the company by the controlling shareholder.
Difficulty in providing a seller's loan to Lapidot
Elsztain acquired control of the IDB holding company in 2014 as part of a debt settlement, and invested NIS 2.7 billion in it, primarily through Irsa. The risk of insolvency and another debt settlement for the company rose significantly over the past year, as reflected in the junk bond yield at which the bonds issued are being traded (a total debt of NIS 2.72 billion).
IDB Development's main asset is a 20.3% holding in Clal Insurance. It is also exposed to changes in the price of 24% more of the shares in Clal Insurance, due to a swap deal it made when selling those shares over the past two years. Earlier this year, IDB Development signed a deal for the sale of up to 18% of the shares in Clal Insurance to three investors: Shikun & Binui CEO Eyal Lapidot, Moshe "Mori" Arkin, and Yakir Gabay. As part of this deal, Arkin and Gabay bought 4.99% of Clal Insurance's shares each, while the deal with Lapidot was not completed. Lapidot asserts that IDB Development violated the agreement between them.
The sale is being delayed because IDB Development is finding it difficult to grant Lapidot a NIS 118 million seller's loan, as required by the agreement between them. Last week, IDB Development announced that it was continuing its efforts to complete the deal, and had received initial indications from financial institutions that they would finance 50% of the amount of the loan to the purchaser under the agreement. Controlling shareholder Irsay is supposed to provide the balance of the seller's loan.
IDB Development today announced that Lapidot had notified it that he intended to have himself appointed a director in Clal Insurance. He has already contacted the Capital Market, Insurance, and Savings Authority commissioner and the chairman of Clal Insurance in the matter.
Published by Globes, Israel business news - en.globes.co.il - on August 25, 2019
© Copyright of Globes Publisher Itonut (1983) Ltd. 2019