Last Thursday, the ultimatum presented by the Russian bank that lent Africa-Israel Investments Ltd. (TASE:AFIL) unit AFI Development $609 million for two projects in Russia ran out. Africa-Israel, controlled by Lev Leviev, did not, however, rush to publicize this development.
In fact, the company updated the Tel Aviv Stock Exchange only this morning, after the news was posted on the “Globes” Hebrew website. The notice to the stock exchange states that negotiations continue, with no commitment on the part of the Russian bank not to present the loan for immediate repayment.
The notice is belated. In late March, Africa-Israel received a warning from Russian bank VTB that because of significant deterioration in AFI Development’s business the company was in breach of the conditions of the loan granted to it, and that the bank could demand immediate repayment. Africa-Israel was given thirty days to negotiate with the bank.
Large Africa-Israel bondholders told “Globes” that it looked as though a further debt settlement in the company was very close. “A new debt arrangement will have to meet two criteria. The first is a substantial cash injection from Lev Leviev, and the second is substantial conversion of debt to equity in exchange for forgoing debt. If Leviev wants to keep control of the company, he will have to inject a great deal of money,” one of them said.
Although AFI Development met the regular payments on the loan from the Russian bank, the bank warned of a demand for immediate repayment because of the revaluation that the company carried out on its Afimall City mall in Moscow. AFI Development wrote down the mall’s value by more than 30%. The mall was recorded on AFI Development’s books at a value of $1 billion, so that, after deduction of the loan, its net value was $519 million. AFI Development reduced the fair value to $685 million, making its net value at the end of the first quarter of this year just $269 million. The bank fears that in a forced sale the value of the mall is liable to fall below the loan amount, and it is therefore demanding further collateral.
To the bondholders it is clear that a recovery in the Russian economy will considerably revive the business of FI Development, and with it Africa-Israel as well. A Russian economic recovery depends on two things: removal of Western sanctions imposed because of Russia’s behavior in Ukraine, and a rise in the price of oil to at least $50 a barrel. The lifting of sanctions looks distant, and the oil price is currently nearer $30 than $50.
The low occupancy rate in Afimall City (78% at the end of the first quarter) and AFI Development’s behaviour towards its bank raise questions about Leviev’s contribution to the company. “At the moment, Leviev’s contribution is low to negative,” a large bondholder told “Globes”, “The assumption that only Leviev can conduct negotiations with the Russian banks is a myth. There are plenty of funds in Europe that are capable of negotiating with the Russian banks and that, in exchange for partnership in AFI Development, will do so more effectively and will even inject cash into the company.”
In 2009, because of a downturn in the position of Africa Israel, Lev Leviev was forced to enter into a debt arrangement unprecedented in its size in Israel. NIS 7.5 billion of debt was rescheduled and converted to shares, bonds and cash to a value of NIS 7.8 billion. Leviev injected NIS 750 million in several tranches. The investors did not take a haircut on the rescheduled debt, but rather received better collateral and compensation in the form of a higher interest rate, shares, and mortgages on assets.
Until 2013 all went smoothly for Africa Israel, but then Russia invaded Ukraine, annexed the Crimea, and the West imposed tough sanctions. Africa-Israel adapted to that as well, but when the oil price plunged its business in Russia again deteriorated.
Published by Globes [online], Israel business news - www.globes-online.com - on May 3, 2016
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