Although it's poised to complete the sale of certain key assets, the liquidity-hungry IDB group is also turning to the MEnora insurance group and to the Bereshit leverage fund for cash.
Group company IDB Development has reached advanced stages of negotiating to borrow up to NIS 150 million from the Bereshit leverage fund and another NIS 150 million from the Menora Mivtachim Holdings group.
It is also holding talks with several foreign banks for an additional NIS 300 million in credit, according to the company's cash flow forecast, published last month with its 2011 results.
The IDB group's precarious financial position is forcing its controlling owner, Nochi Dankner, to seek out funding sources to ensure that the group can make good on its estimated tens of billions of shekels in liabilities to banks and bondholders.
IDB Development has been beset by a substantial decline in the ability to draw dividends from its underlying companies, lack of access to Israel's banking system due to single borrower limitations (a bank can only lend so much of its capital to a single borrowing group), and the inability to rollover its bond debt - considering the high yields (11% ) at which they are now trading.
The Bereshit and Menora loans will carry 7% annual interest with average durations of 4.5 years, and will be secured by options on shares of IDB subsidiaries Discount Investment Corp., Clal Insurance Enterprises Holdings, and Clal Industries and Investments, at prices currently out of the money.
Another possibility being explored is having the lenders issued bonds that would be convertible into shares of these subsidiaries, with the ratio between credit and securities expected to reach 150%.
Putting up a good fight
"IDB's ability to arrange sources of cash is impressive," said a capital market source this week in response to the news.
"On one occasion Dankner brings his associates into an IDB Holding share issue, on another he harnesses foreign banks, and now a leverage fund. Turning to a leverage fund offends Dankner's ego, but he apparently grasps that in the current situation - with the net asset value of IDB Holding scratching minus NIS 3 billion - money has no smell, and that he needs to roll up his sleeves and buy time, even at a high cost, in order to survive. To Dankner's credit it can be said that he and his team are fighting, and we hope IDB manages to get by without a debt settlement."
In the optimistic scenario of market recovery and a rise in the value of shares used as security, the lenders could enjoy double-digit returns of 10% to 13% - like the yields to maturity at which some of IDB Development's bond series are trading. It still isn't known whether Menora will put up the loan from the funds it manages on behalf of its customers or from its own proprietary accounts.
IDB Development has NIS 4.3 billion in bond liabilities, and if the deal with Bereshit and Menora goes through it would ostensibly better the position of its short-term bonds in relation to the lengthier bonds, because of the security backing; but it doesn't seem that holders of the latter could object. IDB Development bonds barely reacted to the unfolding deal this week.
"A leverage fund like Bereshit or Menora could buy IDB Holding bonds in the market at a higher 18% yield, but then the question arises of what would be better: to hold bonds which aren't certain to be paid in full, or to hold securities that could generate handsome returns in the future," said a high-level capital market operator Monday.
The leverage funds are financial entities established about three years ago, with government cooperation, to help companies that are struggling to recycle their debts. This investment is expected to be among the last for Bereshit, which so far has 18 deals for extending credit under its belt and has received a total of over NIS 1.6 billion in stocks. The fund has invested in shares and debt of the Ashtrom group, Israel Petrochemical Enterprises, ECI Telecom, and Aspen Group, among others.
Bereshit is headed by Gabriel Perel, former CEO of Clal Insurance subsidiary Clal Finance investment house. Like other insurance companies, Menora has recently been expanding its activity in extending business credit through private loans. Menora's investments are under the management of Yoni Tal.
Liquid assets of NIS 885 million, loans of NIS 2.3 billion
IDB Development reported having NIS 885 million in liquid assets at the beginning of the year, stating that part of these must be maintained as safety cushions to meet financial covenants on NIS 2.3 billion in loans it took on.
The company needs to lay out NIS 1.5 billion this year to banks, bondholders, and other creditors, along with a similar sum expected in 2013. To meet these financial hurdles, IDB Development is attempting to take a number of measures, but chances of their successful completion are uncertain.
The company expects liquid resources to increase by NIS 31 million from management fee and interest income. It also anticipates these to increase by NIS 392 million, with completion of the sale of its 13% stake in Koor Industries at market value - if Koor's merger into Discount Investment is completed. In addition, IDB received a NIS 194 million dividend from Clal Industries, and it hopes to realize assets worth NIS 57 million.
Mashav sale about to close
Anticipation is also running high at IDB Development for Clal Industries' completion of the sale of its stake in Mashav to the Livnat family, and for the subsequent bagging of a NIS 600 million dividend payment from the subsidiary.
The Mashav sale, valued at NIS 1.3 billion, was put off for two months until the end of May. Closing of the deal is also largely contingent on Antitrust Commissioner David Gilo compromising on his demand that Mashav's fully-owned Nesher Israel Cement Enterprises, a monopoly, cancel discounts to two major customers that account for 40% of its revenues: the Hanson cement group and Readymix Industries.
If all these measures succeed, IDB Development will have NIS 2.76 billion in liquidity, leaving NIS 1.27 billion in the kitty at the beginning of 2013 after meeting all its current obligations. But it will need to come up with additional sources for NIS 950 million between July and December 2013 to cover its remaining liabilities that year, mainly to banks and bondholders. Part of this could come from Clal Insurance, which is 55% owned by IDB Development, completing the sale of its U.S.-based subsidiary, Guard Financial Group, for $218 million (about NIS 813 million ). Clal Insurance could then distribute a hefty dividend, as large as NIS 1 billion overall.
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