Midroog cuts Bezeq parent BCom rating

stock market  picture: Shutterstock

Midroog predicts that B Communications will not meet the payments on its bonds without the consent of all of its bondholders.

Following yesterday's steep drop in the prices of B Communications Ltd.'s (Nasdaq:BCOM; TASE: BCOM) securities, after payments on the company's bonds were halted, rating company Midroog today downgraded the bonds by nine levels, from Baa2 to Caa2. This means that Midroog assesses the company's ability to repay its debt as extremely low in comparison with other issuers of debt, with important speculative characteristics.

B Communications, the controlling shareholder in Bezeq Israeli Telecommunication Co. Ltd. (TASE: BEZQ), owes its bondholders NIS 2.5 billion in two bond series. Bezeq, B Communications' underlying asset, announced on Tuesday a negative asset revaluation of NIS 1.5 billion in its reports for 2018. B Communications yesterday announced that its shareholders' equity would be reduced by NIS 700-800 million, which means that the company is deviating from the covenants it undertook to maintain in the deed of trust for the bonds, among them a minimum shareholders' equity of NIS 650 million for two consecutive quarters.

The deed of trust also refers to the rating for the bonds. If the rating falls below Baa2, the bondholders have the right to demand immediate repayment of the debt, unless the company has liquid resources for the next 18 months. Since B Communications recently raised NIS 118 million, it has sufficient liquid resources until November 2021, so that it meets the condition for avoiding immediate repayment. At the same time, the rating downgrade will increase B Communications' financing costs.

Midroog's analysts say the rating downgrade reflects their projection that repayment failure is very likely. They state: "B Communications' holdings in Bezeq are worth NIS 2 billion at the current market price of Bezeq's share, compared with a total accumulated net debt of NIS 1.8 billion."

Midroog does not believe that Bezeq will distribute a dividend "at least in 2019-2020," in contrast to its previous assessment that Bezeq would be able to distribution a substantial dividend in 2020. Midroog's analysts believe that Bezeq's regular profit, excluding reductions in value and provisions, will be NIS 900 million-1 billion in both 2019 and 2020, and emphasize, "If Bezeq makes additional write-downs, including for its tax assets from Yes's losses in Bezeq's books, the period in which Bezeq does not distribute a dividend could be longer."

Midroog's downgrade states that B Communications has NIS 700 million in liquid balances and NIS 233 million in debt maturities due for payment on March 31. Midroog's economists believe that B Communications will not pay its bondholders on the upcoming date without the consent of all the bondholders and a court ruling. Their basic scenario is therefore payment failure, which does not take into account the alternative that the bondholders will allow the upcoming payment. Midroog believes that B Communications will bring an investor into the company and reschedule its debt or liquidate its assets, but adds, "Uncertainty about how the sale will be held and how long it will take is increasing." Midroog believes that a debt arrangement will take about a year.

B Communications seeks to cut its CEO's salary and bonus

Internet Gold Ltd. (Nasdaq: IGLD; TASE:IGLD), the controlling shareholder in B Communications, summoned a bondholders' meeting for purposes of providing information and consultation. US investment fund Searchlight recently sought to acquire the shares in B Communications held by Internet Gold for NIS 387 million at NIS 20 a share, but in a vote a few days ago, Internet Gold's bondholders rejected the offer, which would have written off 27% of the debt. They preferred to continue talks with the fund or to work towards an arrangement for the NIS 722 million debt. Internet Gold's bondholders now face the possibility that B Communications, their underlying asset, will be given over to its creditors, leaving Internet Gold's bondholders with almost nothing.

At the same time, B Communications summoned a shareholders meeting for approval of its remuneration policy for its senior executives. The meeting is necessary because three years have passed since the policy was last approved. The company is seeking to cut CEO Ami Barlev's monthly salary from NIS 100,000 to NIS 70,000 and his maximum bonus from NIS 2 million to NIS 500,000. On the other hand, an increase in the maximum bonus for the company's CFO from NIS 150,000 to NIS 200,000 is also proposed because of his importance to the company.

Published by Globes, Israel business news - en.globes.co.il - on March 21, 2019

© Copyright of Globes Publisher Itonut (1983) Ltd. 2019

stock market  picture: Shutterstock
stock market picture: Shutterstock
Twitter Facebook Linkedin RSS Newsletters גלובס Israel Business Conference 2018