The report of the erroneous transfer of millions of dollars by foreign real estate company All Year Holdings Ltd. to its controlling shareholder Yoel Goldman, led to real drama in trading in the bonds of the North American real estate companies listed on the Tel Aviv Stock Exchange the other day. The price fall continued yesterday. In the eye of the storm are two unsecured All Year Holdings bond series, which fell by 5-7% yesterday, making it a 20-22% drop in two days, on higher than usual volumes.
As in previous instances of material negative reports concerning one of the foreign companies originating in North America (the BVI companies), this time too the untoward report from All Year Holdings, together with negative news from several other companies (an erroneous cash transfer at Chosen Properties Ltd., a downward revaluation of a property let to the controlling shareholder of Delshah Capital Ltd.), dragged down nearly all the bond series in the sector, with price falls that in some series reached 3-4%, after some of them fell by 6-7% on Sunday.
The TelBond Global Index, which includes nearly 40 debt series rated A or higher issued by the foreign companies, fell 1% yesterday, following a fall of 2% on Sunday. Since the beginning of the year, the index has fallen 9%, making it the worst performing index on the Tel Aviv Stock Exchange, apart from the SME 60 small cap index. Since it was launched in July 2017, the TelBond Global Index has declined 4%.
Sunday's falls reinforced the negative sentiment that has characterized trading in the debt of the North American companies for a long time, and has depressed most of the bond series to double-digit, or at least high single-digit yields. The yields reflect lack of confidence in the ability of almost all of the foreign companies to cope with their debt repayments, even if in some cases there has probably been some over-shooting, and mass flight from these companies' bonds with no direct connection to their financial strength.
Of the 50 bond series issued on the local market by real estate companies from the US, totaling over NIS 20 billion, more than 20 series, totaling some NIS 9 billion, are traded at double-digit junk yields or close to that level. About ten additional bond series, totaling some NIS 4 billion, are traded at yields ranging between 6% and 9%.
The declines began in the summer, and mainly resulted from large redemptions from local mutual funds that made it difficult for both foreign and local companies to raise new debt, so that within a few months bond offerings to the tune of some NIS 3.5 billion promoted here by US companies were cancelled or postponed.
The negative sentiment was exacerbated by increasing fears of an interest rate rise in the US (which indeed materialized as expected) and specific negative events at a few of the companies, the most material so far being at Brookland Upreal Ltd., which is on its way to a debt arrangement with its bondholders.
While Brookland Upreal's debt is small in comparison with that of other US companies, totaling NIS 150 million in two series, the problems emerging at All Year Holdings represent a jump in the amount of problem debt, which in its case amounts to NIS 2.35 billion (more than the total debt of Delek Real Estate, which was in the headlines for months).
Besides the yields on Brookland Upreal's two series (90% and 660%), which reflect the company's inability to handle its debt, among the substantial bond series that have reached high junk yields are Extell Ltd., with a range of 14-19%, Waterstone Properties Ltd. A, Delshah Capital Ltd. A, and Starwood West Ltd. A, at around 18%, and the D and B series of All Year Holdings, at yields of around 15%.
IBI Investment real estate analyst Nadav Berkovich says, "The past few days have changed investors' minds. Apart from All Year, reports from Chosen Properties and Delshah Capital brought back the concerns about the standard of corporate governance in the sector, and in a big way, after it was under close scrutiny in any case following events at Brookland Upreal.
"The market is also under pressure from the fact that the financials of some of the companies, among them All Year, indicated possible cash flow problems. Problems at a company like All Year can have a lateral effect on the entire sector, more than that of Brookland," Berkovich adds.
On a possible change of direction, Berkovich says, "First of all, it is necessary to restore investors' confidence, and then it will be possible to talk about the business aspect. We still believe in the major, strong companies among the American companies. In their case, even if the Israeli capital market turns its back on them, it will still be possible to get the money back from them. In times like these, the differences between the companies become sharper, highlighting the importance of proper corporate governance and good transparency."
Published by Globes, Israel business news - en.globes.co.il - on December 4, 2018
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