Can Kardan repay?
Can Kardan repay?
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In times of crisis, leveraged holding companies suffer a decline in their asset value and an increase in their leverage ratio. This principle did not spare Kardan NV - under the control of Joseph Greenfeld, Avner Schnur and Eitan Rechter - which has an exposure to real estate and financial activities in Eastern Europe and China.

Kardan NV's share price has registered declines over a long period, and the company's market value plummeted by 95% from its peak of about NIS 6.5 billion at the end of 2007 to just around NIS 280 million. The yields on the bonds, totaling around NIS 2.5 billion, soared to over 30%.

In the wake of these developments, at the beginning of this week the rating company S&P Maalot cut Kardan NV's credit rating by two notches, from BBB + to BBB-. It assigned it a Negative outlook.

"Kardan's downgrade stems from an increase in the LTV ratio (Loan to Value ) to a level that is inconsistent with the previous rating," explain Maalot analysts Yuval Torbati and Zvi Boimer. "Despite a pattern of realizing assets over the past year - primarily Sovcom Bank for 144 million euros and Kardan Israel's distribution (restructuring of its holdings ) in exchange for a debt reduction of about 60 million euro - Kardan's LTV gradually rose from about 50% in July 2011 to about 60% in June 2012.

Maalot attributes the increase in Kardan NV's leverage to a 70% drop in the GTC (Globe Trade Center ) Poland stock price and a high cash burn rate at the company holding level. In addition, Kardan NV wrote off part of the value of the private companies it owned, primarily because of the difficult business climate in Central and Eastern Europe.

At this stage, Kardan NV has does not want a new debt arrangement. The company is continuing to take advantage of the low stock prices for a buyback - while registering an accounting gain.

"We see deterioration in the company's liquidity profile and now regard it as 'less than satisfactory,'" emphasizes Maalot. "While we do recognize that the company has sufficient sources of funds for 2012 and 2013, we believe that it will face a significant challenge to repay its debt of about 140 million euro in 2014."

Kardan may realize assets on a relatively large scale, most likely in Kardan Land China and THL Group (the water infrastructure company ), or in companies held by KFS (which coordinates the financial activities in Eastern Europe ). There thus exists an exposure to non-timely execution of asset sales, given the illiquid nature of the company's assets,"

Maalot said Kardan's credit rating continues to be constrained because of the weakness of its asset portfolio, which including its"very low credit quality."

Most of the assets are not market-traded and the high leverage is accompanied by negative cash flow on the holding company level, Maalot said.