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Concern is mounting in Israeli diamond circles about the enormous debts of the Fabrikant gem group, which filed for bankruptcy protection of its American arms in the U.S.

M. Fabrikant & Sons and Fabrikant-Leer both filed for Chapter 11 protection relief, the company revealed on Saturday.  It  company said the filing does not include foreign or domestic affiliates.
 
The Fabrikant group owes about $400 million, of which about half is to banks and the rest to industry players.

A top source at the Ramat Gan diamond exchange commented that among its debts is $20 million to Bank Leumi (TASE: LUMI).

"If the company collapses, it will have a tremendous effect on the world diamond industry and on the Israeli one," said the source.

Meanwhile, in its statement New York-based Fabrikant said that all its facilities would remain open as usual. 

The whisper in diamond circles is that Fabrikant can't reach an arrangement with all its creditor banks, hence its failure to find an investor who would provide sorely-needed financing.

Insofar as could be ascertained, the Fabrikant group had reached an understanding with its banks some months back. The understanding included it presenting a restructuring plan by mid-February 2007. But it seems there is discord over credit during its restructuring period.

At the end of last week Haim Even Zohar, an expert on the global diamond industry, stated that the company could be saved by an understanding between the banks.

Israeli diamond merchants are losing sleep at the thought that defaulting on debt that large could toughen credit terms up and down the sector. Also, writing off Fabrikant's debt will lead to cash flow crunches.

The diamond source noted as an aside that if Fabrikant collapses, the Israeli company Salant could come under the spotlight: it just bought Fabrikant's Israeli business less than a month ago, at the end of October. The two companies had cooperated in Israel under the name Fabrikant-Salant, and the joint company had become a leader in gem exports from Israel. it was also one of DeBeers' favored clients.

After buying the controlling interest, the Israeli company changed the joint company's name to Salant. But Israeli sources are concerned that Fabrikant's creditors may want more information.