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Can Lev Leviev repay NIS 23 billion? By Michael Rochvarger Tags: Lev Leviev, Africa Israel  What a reversal of fortune, so to speak. Just 18 months ago, if anybody in the Africa Israel group woke up in the morning wanting to raise money on the capital market, all he had to do was phone an underwriter. The underwriter would handle the procedure, and within hours the sprawling real estate giant would be a few hundred million shekels richer. Today Africa Israel's credit rating is three notches lower. It's starving for fresh cash and its assets value is plunging. Investors don't want its bonds, even at annual yields of more than 20%. The worst day for Africa Israel was in early October, when its shortest-term series of bonds, NIS 320 million coming due in 2010, went for 63 agorot per shekel of face value. The price translates into a junk yield of around 40%. In parallel, Africa Israel's share price plunged 15% to NIS 63, down almost 90% from its peak in May 2007. Advertisement Africa Israel and Leviev have gone back five years in time, share price-wise, and the capital market seems dubious as to their ability to repay the NIS 23 billion the group owes. The bankers are also worried and want more collateral from Leviev. The value drop is so extreme that it's hard to remember this is the same confident company that does business in 15 countries, is involved in 130 major projects, and employs thousands. Leviev revs engines Two days after that horrible day in October, Leviev flew from his new home in London to Tel Aviv and summoned capital market players to a meeting at the Crown Plaza hotel (which he owns). "I've made mistakes, but I'm the driver and you're the passengers. It's my job to transport you safely, even if there are bumps in the road," he said, and added, "I believe Africa Israel will meet all its liabilities." To a degree, his assurances worked and yields on Africa Israel bonds edged down to 8%-25% (the company has several series of bonds, each with its own characteristics and credit ratings). Yet once Leviev's word could have moved mountains. In January 2007 he told TheMarker that Africa Israel would be worth $7 billion in a year. Investors believed, and within months, that's what Africa Israel was worth. Today Africa Israel is worth less than $1 billion. Asked why Africa Israel isn't buying back its bonds, given how attractive their price has become (no demand, price drops), Leviev said: "Africa Israel isn't a financier. We prefer to keep our cash for project development." Hot points of trouble Analysts who met with him that day say they don't think he's living in a fantasy world. He's well aware of the crisis' dimensions and is signaling that he can overcome, perhaps poorer, but still on top. Africa Israel features several hot points of trouble: exposure to real estate, business in Russia, eastern Europe and the U.S., and debts. Leviev has overcome crises before but the scope of this one is huge. At the end of June 2008, Africa Israel's shareholders equity totaled NIS 5.9 billion and it had NIS 38 billion worth of assets. Its enormous leverage, however, meant that for each NIS 1.00 in shareholders equity, it had borrowed NIS 5.50. Its assets include NIS 6 billion worth of investment property plus NIS 8.4 billion worth of property under development. Of that, about half is in Russia, and 26% in the U.S. The balance sheet also shows NIS 2.5 billion worth of land and NIS 3.5 billion in buildings earmarked for sale. But since the first half's end, property prices have plunged and Africa Israel faces equity writeoffs - which could be mitigated by future upward property revaluation, and appreciation of the dollar against the shekel. In this quarter alone, the dollar's rebound should add NIS 250 million to Africa Israel's shareholders equity. Also, at the first half's end, Africa Israel had NIS 7 billion cash and equivalents. Against that, its consolidated debt to the banks and bondholders totaled NIS 23.2 billion, equivalent to 61% of its balance sheet. Of that, short-term liabilities to banks and others totaled NIS 7.75 billion and long-term liabilities to banks totaled NIS 6.5 billion. Bondholders are owed NIS 9 billion, mostly by the parent company Africa Israel and mostly linked to the consumer price index. The CPI's increase from January to June raised the company's finance costs to NIS 319 million, a major reason for its NIS 46 million loss in that period. Africa Israel Properties owes bondholders NIS 800 million, Africa Israel Industries owes NIS 350 million, Africa Israel Residences owes NIS 300 million and Africa Israel Hotels (delisted) owes NIS 80 million. After 2010 Out of the NIS 7.4 billion that the parent company owes (itself, not including the debt of group companies), it has to return NIS 1.7 billion in 2009 and 2010, and another billion in 2011. The parent company has NIS 1.5 billion cash and a NIS 1.2 billion credit line until year-end 2009. If the crisis doesn't worsen and Africa Israel doesn't pour money into investments or subsidiaries, it can meet its liabilities until the end of 2010. As a builder, Africa Israel expects cash flow of hundreds of millions of dollars in the next few years. That's money earmarked to return debt from 2011. That said, the company's main source of liquidity is selling assets, which hasn't been going well. If Africa Israel Properties really had sold five malls in Israel to David Azrieli for NIS 2 billion, as it had been negotiating to do, bondholders would have smiled. In October, Leviev hinted that he'd missed an opportunity and might consider a lower price after all. Russian exposure The company's Russian exposure worries the market not a bit. Uzbekistan-born Leviev was one of the first Israeli businessmen to work there, and he's well-connected. In May 2007 he floated subsidiary AFI Development, which invests in Russian property, in London. It raised $1.4 billion at a market valuation of $5.9 billion. Since then AFI has lost 90% of its market cap: It's now worth $680 million, which is $120 million below its cash position. AFI's liabilities totaled $680 million at the end of June 2008. Despite the crash of Russian equities and property values, Leviev remains upbeat about the area, and reiterates time and again that all the promises he made when floating AFI will be kept. Demand for property in Russia remains strong, he says, and the flight of foreign investors does him nothing but good. Indeed, if Leviev's grand plan for the half-billion dollar Mall of Russia he's building in Moscow works out, Africa Israel should get operating cash flow of $200 million to $300 million a year, which would do well by AFI's liquidity. It could also exit at a handsome price. But massive bankruptcies loom in Russia, which is a major fly in the ointment of Leviev's scheme. Africa Israel also owns $2.4 billion worth of property in the U.S., mainly in New York, Miami, Phoenix and Las Vegas. He spent billions there with Shaya Boymelgreen after the Twin Towers disaster, but the two dissolved their partnership early, in 2006, amid mutual accusations. Given the state of the market today, Leviev may yet miss the gay days of their partnership. Africa Israel has started to unload U.S. properties at low prices, but there's no telling whether the deals will be consummated, given the state of the market. Just last week Africa Israel admitted that a deal to sell "Block 42" in Miami for $89 million has been postponed to March 2010. Africa Israel is also involved in 32 projects in eastern Europe, most of which are scheduled to be completed in the second half of 2009. But its target countries, including Hungary, Latvia and Bulgaria, have been hard hit by the global financial storm, which threatens Africa Israel's schedule, at the least. But don't think Leviev has been impoverished even after Africa Israel's share price plunge, and there's still his private business - diamonds, gold, property, energy, agriculture - whose value remains a mystery. A large one. Bookmark to del.icio.us   Interview with a killer Yigal Amir describes how the idea to assassinate Yitzhak Rabin came about. Absentees for McCain Exit poll reveals U.S. absentee voters in Israel back McCain over Obama by 3-1.   1.   Lev, come back home 09:59  |  Ken 30/10/08

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