A glance at the current situation of the American real estate companies that issued bonds to the tune of billions of shekels in Tel Aviv reveals that, since the start of the coronavirus crisis, most of them have found it difficult to go back to the primary market to raise more debt. In the absence of the ability to recycle debt, in the case of most of these companies, the risk to the repayment of existing debt rises.

The situation is especially dire for those companies whose bonds are currently traded at double-digit yields to redemption. They will have to sell off a considerable number of assets, or present substantial improvement in their businesses, if they are to meet their debt repayments on schedule.

At the end of the second quarter of 2020, none of the North American real estate companies traded in Tel Aviv had a going concern qualification appended to the auditor's report on its financial statements. Nevertheless, past experience shows that such a qualification tends to appear on financial statements only after the company's financial position has become very difficult indeed. Companies that are only moderately financially sick will at worst merit a line from the auditors drawing attention to their position and to the management's plans for recovery.

The bonds of thirteen companies belonging to North American developers are traded at double-digit yields, indicating the high risk that investors attribute to these companies' activities and to their ability to repay their debts in full and on time. These bonds, which fall within the definition of junk bonds, represent aggregate debt of some NIS 11 billion - a measure of the depth of the public's exposure to risky debt which was converted to dollars and invested in North American real estate ventures.

This is about half of the total of NIS 21 billion North American debt listed on the Tel Aviv Stock Exchange., represented by the TelBond Global Index, which has fallen 1% since the beginning of 2020 and has returned just 3% in the past three years.

The foreign real estate companies that issued debt in Tel Aviv are not all of one cloth. Nevertheless, the fact that most of them are incorporated in the British Virgin Islands distances the companies from their assets in North America and raises the risk to their bondholders in the event of their collapse.

In addition, there are other factors, such as the geographic distance from management headquarters, the differences in business culture between Israel and North America, different mentalities of local and foreign managers, and an inability on the part of investors to verify information about the mechanism that really exists within the framework called a company. All these factors have led Israeli investors to demand wider safety margins from the North American companies, which in certain cases turn out in retrospect not to have been wide enough.

So far, the companies issuing bonds in Tel Aviv for North American real estate developers have yielded three resounding crashes that led to the write-down of most of the issued debt, amounting to a total of NIS 1.24 billion: Canadian company Urbancorp, owned by Alan Saskin (debt of NIS 180 million) and Brookland Upreal, owned by former Israeli Boaz Gilad (debt of NIS 150 million) were the first and smaller collapses. They were followed by Starwood West, with debt of NIS 910 million.

What broke Starwood West was the coronavirus crisis in the US and the closure of its malls there, but the company was stuttering even before that because of the huge leverage it took on itself to buy those malls, and because of their disappointing performance, leading parent company Starwood Capital (owned by US-based billionaire Barry Sternlicht) to abandon the assets and not inject further capital to save them.

Top of the list of North American companies currently at risk is All Year Holdings Ltd., owned by Yoel Goldman, which has four series of bonds totaling NIS 2.3 billion. All Year's bonds are currently traded at a yield to redemption of 34%, after being given a double downgrade by Midroog.

After it in the high-yield list come Waterstone Properties (21%); GFI Real Estate (18%); Extell (18%); MDG Real Estate Global (17%); Hertz Properties Group (17%); Malibu Investments (14%); The Leser Group (13%); Noble Assets (13%); Moinian (12%); Copperline Americas (12%); Encore Properties (10%); and Joel Weiner's The Zarasai Group (10%).

The Zarasai Group, it should be stressed, still enjoys a high, AA rating from S&P Ma'a lot for its NIS 1.8 billion debt. Investors, however, do not seem to be so sure, as evidenced by the length of the process of issuing the company's 5 series bond.

Stephen Ross's Related Commercial Portfolio Ltd. is absent from the list. The company recently completed a debt settlement with its bondholders after getting into liquidity difficulties. It partially repaid its debt and deferred the balance to September 2021. It is currently traded at a yield of just 5%.

Related Commercial Portfolio was the first to be substantially hit by the effect of eh coronavirus crisis on the US market, but the crisis has directly and indirectly hurt many of the foreign real estate companies, as well as their equivalents in Israel and around the world. The impact was initially on commercial and hotel property companies, which had to close malls and hotels during lockdowns, and then absorb loss of turnover because of the decline in tourism and shopping.

Some of the companies, however, started out insufficiently liquid, and with too much leverage, making them vulnerable even before the pandemic broke out.

IBI real estate analyst Nadav Berkovich wrote this week that the coronavirus pandemic had hurt most of the North American real estate companies. In some cases, he said, the impact was on capital, in the form of negative revaluations, and in some cases it was on cash flow, which was the case mainly with the hotel and commercial companies. "As a result," he writes, "some of the companies have come very close to the financial covenants in their bond trust deeds or in loan agreements with the banks."

Published by Globes, Israel business news - en.globes.co.il - on October 11, 2020

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