Shares of specialty semiconductor manufacturer TowerJazz plummeted yesterday after drawn out negotiations between the company and Israel's two largest banks ended without agreement.
Bank Hapoalim and Bank Leumi want to convert their capital notes into shares, so that they can finally cash in on their debt. The banks hold capital notes from Tower that are worth some NIS 600 million combined.
Tower, however, released a statement in response to the news reports about the conversion, saying that it "has not been provided with notice by any of its capital note holders that they intend to convert capital notes into shares."
Rather, the company said, the banks have asked it to file a registration statement with the U.S. Securities and Exchange Commission, to register ordinary shares underlying 85 million capital notes - 45 million for Leumi and 40 million for Hapoalim - which would be issued if either or both banks wish to convert the capital notes into shares.
TowerJazz plunged 14% on the Tel Aviv Stock Exchange in response to the news, but recovered somewhat, to end the day down only 9% on very high turnover for the share, of NIS 43 million. The stock also plummeted on the Nasdaq when it opened.
The overhang of a possible conversion of notes by the banks into shares is weighing on the stock, since such a move would dilute the holdings of existing shareholders.
TowerJazz's parent, Israel Corp., also holds capital notes from the company. "Israel Corp. has informed the company of its intent to convert all of its holding of capital notes into shares, but as a long-term strategic shareholder it did not ask to register its shares," TowerJazz said. "Israel Corp. has informed TowerJazz that it does not intend to sell or trade its shares at the present time and has expressed its belief in the company's strategy and growth plans."
In 2006 and 2008, the banks converted debt into capital notes as part of a restructuring of bank debt, while Israel Corp. injected new money into TowerJazz.
Israel Corp., Hapoalim and Leumi invested $550 million in cash and debt conversion, and received 399 million notes. The capital notes are solely an equity vehicle, with each note being convertible into one share.
The banks may have difficulty in converting the notes to shares, since they would likely represent more than the 5% that Israeli law allows banks to hold in a company of which it is a debt holder.
The two banks have already written off their investment in Tower, so that any proceeds from the sale of the shares would be profit.
Hapoalim said it does not comment on its customers, while Leumi was not available for comment.
TowerJazz said it has been engaged in discussions with its capital notes holders over the past several months, through a large third-party international financial institution. Talks have been focused on notes buy-back, in a model and at a price that the company believed would create value for all its stakeholders and the company.
The banks requested a price that could not be justified by the company, according to Tower; hence an arrangement has not yet been reached.
