Midroog cuts Delek rating as debt fears rise

Yitzhak Tshuva

Midroog believes a failure by the company to repay its debt is very likely.

The Midroog credit rating agency has downgraded Delek Group Ltd. (TASE: DLEKG) bonds by 14 levels, from A2 to Ca, because it believes a failure by the company to repay its debt is very likely.

"The bond rating is therefore determined according to Midroog's methodology for rating the risk of payment failure for debt instruments and impaired debt instruments. It was decided in accordance with our estimate of the recovery rate for the bonds, assuming a default and the degree of uncertainty in this assessment. Midroog evaluates the bond recovery rate at 35-65% under the basic scenario, and in the higher end of this range," Midroog wrote.

The current rating for Delek Group's bonds is one level above C, the lowest level that Midroog gives, which reflects the poorest repayment capability. Delek Group, controlled by Yitzhak Tshuva, owes NIS 6 billion to its bondholders, and its bank debt is in excess of NIS 2 billion.

Market cap under NIS 1 billion

The prices of Delek Group's bonds plummeted to NIS 0.16-0.22 per bond yesterday in response to the downgrade by Midroog. These prices indicate an extremely low probability that the debt will be repaid in full, and reflect annual yields to maturity varying from 2,067% for the shortest-term bonds and 90% for the bonds with the longest duration. Yesterday's slide in Delek Group's share price drove its market cap down below NIS 1 billion.

According to Midroog, the expectation that Delek Group will default on its bonds "rests on our assessment that the company's liquidity and financial flexibility will worsen significantly as a result of the global economic and financial crisis that has been taking shape in recent weeks, following the spread of the coronavirus."

Midroog added, "This extreme event of the coronavirus epidemic, which has slowed economic activity in China and the entire world, is also causing a decline in demand for energy output. At the same time, the failure of OPEC countries to agree on a corresponding cut in oil production has pushed prices of a barrel of oil down sharply."

The combination of all of these factors has caused a 60% drop this year in the value of the Delek Drilling LP (TASE: DEDR.L) partnership, controlled by Delek Group. In Midroog's opinion, the value of Delek Group subsidiary Ithaca, which operates in the North Sea, has also decreased sharply because of its exposure to oil prices, simultaneously with a sharp decline in the value of similar companies listed overseas.

"These events have generated a great deal of uncertainty about the company's ability to reschedule its undertakings, complete deals for the sale of assets, and take advantage of the financial flexibility that it had before the crisis," Midroog writes.

In Midroog's opinion, the high probability of a default is based on breaches concerning the current securities and financial criteria by Delek Group with respect to the banks. These breaches give some of the banks grounds for demanding immediate repayment of the debt.

Midroog says that the current crisis has increased Delek Group's rate leverage to over 90%, and that the company's liquid balances, which amounted to NIS 1 billion at the beginning of 2020, have been significantly eroded since. The company cut back its bank credit, mainly because of the falling value of its collateral, and also repaid bonds according to its repayment schedule. Midroog believes that the company's ability to take advantage of financial flexibility in the form of unattached assets has been significantly impaired.

Delek: Midroog's information is erroneous

Delek Group said in response, "At a time when the entire world is in the midst of one of the worst-ever crises, at a time when the spread of the coronavirus has made all of the markets volatile and is affecting companies in all sectors, Midroog has acted irresponsibly and unprofessionally, even though we told it that it was basing itself on erroneous and incorrect information. It is unreasonable, disproportionate, and illogical to assess a company at this point in time according to the current values in the markets, which do not reflect the real values of companies, and certainly do not constitute a correct, accurate, and complete picture for preparing professional and reliable work.

"Delek Group is a strong and stable company with significant assets, the activity of which has not been affected by the current crisis. We believe that it is unfair, and even irrelevant, to draw decisive conclusions about the company's rating at a time when the entire world is in upheaval and entire sectors are paralyzed. Delek Group, in contrast, continues to operate and benefit from the cash flow of its subsidiaries, which are still producing and supply oil and gas under signed export and marketing agreements.

"Instead of waiting for things to clear up and getting all the data, as could have been expected at such a time, Midroog acted unprofessionally and in bad faith, without taking the current situation into account. We regard it as fully responsible for all of the damage that will be caused to the company and its investors. Delek Group is a strong company with excellent oil and gas assets and financial capability and flexibility that will enable it to weather the current global crisis - a crisis that is affecting all of the companies and markets in the world."

Midroog responded to Delek Group's remarks by saying, "The Midroog rating company operates according to the rating methodologies that it publishes, according to its professional judgment and procedures. According to Midroog's objective judgment, its rating represents the credit repayment capability of the issuers rated by it. Midroog operates transparently and openly towards the investors in the debt instruments that it rates, and towards all of the ratings consumers."

Published by Globes, Israel business news - en.globes.co.il - on March 24, 2020

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

Yitzhak Tshuva
Yitzhak Tshuva
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