Sources inform ''Globes'' that the liquidity problems at Markstone Capital Partners Group LLC's have forced it to mortgage its stake in Magnolia Silver Jewelry Ltd. to private equity fund Fortissimo Capital in exchange for a NIS 40 million loan.
The media recently reported that Markstone, run by Ron Lubash, had been in negotiations to sell Magnolia to Fortissimo, run by CEO Yuval Cohen, but in practice, Magnolia's shares were already mortgaged to Fortissimo. Magnolia had a NIS 40 million owner's loan from Markstone, which sought to repayment of it. However, Magnolia has a debt, estimated at NIS 50 million, to Mizrahi Tefahot Bank (TASE:MZTF), which has a first lien on Magnolia's shares and assets.
Since the owner's loan is subordinate to the Mizrahi Tefahot Bank's loan, Magnolia could not repay the money to Markstone. This is where Fortissimo came into the picture, by acquiring the owner's loan and releasing the money to Markstone. Mizrahi Tefahot Bank has senior debt and liens on Magnolia's assets and shares, and Fortissimo has a subordinate lien.
The sources added that the debt problems of Markstone and some of its portfolio companies resulted in Magnolia, which is fairly good business shape, to extend a NIS 10 million loan to bookseller Steimatzky Group, which Markstone also owns. Steimatzky, which has liquidity problems, is due to be sold to Keter Publishing House Ltd. and office supplies retailer Kravitz Ltd. (so far as is known, Steimatzky's debt to Magnolia will be transferred to Markstone).
There have been reports lately that Markstone wants to float Magnolia on London’s Alternative Investment Market (AIM). A few weeks ago, a Markstone executive told "Globes" that it was seeking to float Magnolia at a company value of NIS 300 million, and that the company's annual turnover was NIS 250 million. Earlier, Markstone told market sources that Magnolia was profitable and had annual earnings before interest, taxes, depreciation and amortization (EBITDA) of NIS 20-30 million.
Today, except for a 20% stake in nylons manufacturer Nilit Ltd., Magnolia is Markstone's only portfolio company that is profitable. The other holdings include Steimatkzy, Amfic Ltd. (formerly Prisma Investment House), Tomcar Ltd., Elran Real Estate Ltd., and soil stabilization solutions company PRS (Mediterranean) Ltd. Magnolia is not the only Markstone portfolio company with mortgaged shares; Markstone's creditors (headed by the banks) reportedly have a number of liens on the fund's various assets.
Markstone's cash flow problems, which "Globes" recently revealed, and the fact that it has been selling assets for a long time, have forced its owners to increase its debt, including with loans at grey market interest rates. This means that, even after the sale of its assets, Markstone's investors will probably have to recognize a loss on their investment in it.
Markstone declined to comment on the report.
Published by Globes [online], Israel business news - www.globes-online.com - on April 27, 2014
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