Dankner
Nochi Dankner. Photo by Moti Milrod
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Creditors of the two companies at the top of the IDB group outflanked the group's controlling shareholder, Nochi Dankner, on Thursday, by joining forces in an effort to take over the corporate empire.

Their move makes it more likely that the court will take control of IDB from Dankner. But it is an unusual development, as will be explained below, because the interests of various IDB bondholders are not identical. Yet they managed to bridge those potential conflicts of interest and join forces for what they see as the overall benefit of the conglomerate as a whole.

The move may also serve to gain the court's confidence regarding the future disposition of IDB - the country's largest corporate consortium, which includes such iconic businesses as the Super-Sol supermarket chain and Cellcom, the cellular service provider.

The recent developments also raise a number of questions:

Why is the agreement between IDB Holding and IDB Development bondholders surprising?

The pyramidal corporate structure of the IDB group, in which IDB Holding is at the top of the pyramid and IDB Development further down, creates inherent conflicts of interest among various creditors. Most of the IDB companies, including Super-Sol and Cellcom, are held by IDB Development - which owes creditors, including bondholders, an estimated NIS 6 billion.

IDB Development is currently facing a demand in court by its bondholders for a court-ordered recovery plan for the company. The creditors are taking the position that the company is nearly insolvent, while IDB Development's management insists this is not true.

IDB Development's controlling shareholder is IDB Holding, which in turn is controlled by privately held companies of Nochi Dankner himself. IDB Holding itself owes about NIS 2 billion to creditors and is fighting a demand for the company's dissolution. Dankner is seeking to inject additional funds into IDB Holding from Argentine-Jewish businessman Eduardo Elsztain. Dankner insists that IDB Holding is a viable business.

When it comes to renegotiating corporate debt, the rule is that when the controlling shareholder is unable to meet his company's obligations, he can be thrown out of the corporation and the creditors can take over. If that happens in the case of the two IDB companies, the creditors would step into Dankner's shoes. The tricky part is that if IDB Development's shareholders take over the company from IDB Holding, it would leave the creditors of IDB Holding without its major asset - IDB Development.

In his prior court decisions in the case, Tel Aviv District Court Judge Eitan Orenstin hinted that IDB Development's creditors needed to find a solution that would also take the interests of IDB Holding's bondholders into account. The joining of forces by creditors of the two companies therefore makes it more likely that the judge would hand the companies to the companies' creditors.

What is necessary for the court to take such a step?

The court must first make a finding that the two companies are insolvent, or at least very close to insolvency. At this point, there is no such court finding. The agreement among bondholders of the two companies could hasten such a finding, if that's what the bondholders want.

Bondholders of the parent company, IDB Holding, contend that the company is insolvent and they cite Dankner's search for additional funds as supposed evidence in support of their position. If so, they would argue, they are the rightful owners of IDB Holding, and in turn should also have control of the company's subsidiary, IDB Development. What is important here is that those who would have control of IDB Development and the company's creditors are both in agreement that it is insolvent and should be taken from Dankner. And they also have an agreement on a recovery plan.

Can Dankner still foil such a development?

In principle, he could. First of all, if Dankner finds an investor to inject more funds into IDB Holding and avoid a finding of insolvency, he would not lose control. But if this happens, the question remains over whether IDB Development is insolvent. Its creditors make that claim, but Dankner's representatives have declared over and over that it can meet its obligations.

Judge Orenstin has been provided with three totally different expert opinions regarding the value of IDB Development and its ability to repay its debts. Orenstin has said he cannot rely on any of them and instead has enlisted the help of Eyal Gabbai, a former director of the Government Companies Authority and former director general of the Prime Minister's Office, to figure out what the true situation is at IDB Holding and IDB Development. Gabbai was actually a driving force behind the compromise agreement worked out between the bondholders of IDB Holding and IDB Development.

Gabbai will be required to submit his opinion, after which the parties with an interest in the matter will have a chance to respond. Gabbai's behind-the-scenes involvement may be an indication that he would support a handover to the creditors.

If the court orders such a step, the creditors of each company would have to convene and cast ballots on the recovery plan. The law requires majority approval among creditors, and together that majority must be owed 75% of the debt.

Can creditor banks scuttle the plan?

If control is transferred to the bondholders of the two public companies, the chances that the banks that loaned funds to the privately held companies (through which Dankner controls the IDB group) are nil. So they have an interest in opposing the recovery plan. The banks together, for example, are owed more than 25% of the debt that IDB Development must repay. They could block a deal, although IDB Development's bondholders might then counter that the banks' motives are improper.