Benchmarker / What's a bondholder to do when the company owner dies?
During the global financial crisis, Yehuda Ofer's Central European bought back some of its bonds, at rock-bottom prices. And despite its troubles in January the company managed to sell its own bonds again, for a profit of NIS 26 million.
A great many mourned the death of business baron Yehuda "Yuli" Ofer, and with good reason. Ofer was an extraordinary businessman, with a global reach, and presumably left behind a decent estate, too. But while his shipping and banking activities were known to all, Ofer also had a company that isn't a rich source of headlines, or of profits: Central European Estates, a real estate company whose bonds are traded on the Tel Aviv Stock Exchange.
Central European owns properties in Eastern Europe, mainly in Hungary, Serbia and Slovakia. It tapped the public for money in 2006, raising NIS 160 million from pension funds and insurance companies. Since then, things have changed. Demand for property in Eastern Europe declined. Refinancing - borrowing more to repay old loans - became tougher and more expensive. Central European posted a loss of NIS 102 million for 2010, and reported losing NIS 26 million more for the first half of 2011. The company has an enormous equity deficit - the amount by which liabilities exceed asset - NIS 91 million and a negative cash flow: In the first half of 2011 the company burned through NIS 19 million.
During the global financial crisis Central European bought back some of its bonds, at rock-bottom prices. And despite its troubles in January the company managed to sell its own bonds again, for a profit of NIS 26 million. Why did the market have faith in the company? One reason was Ofer's broad shoulders, financially speaking. Apparently the consensus in the market was that without him, Central European lacked a raison d'etre.
In July the parent company of Central European, Premium, undertook to give Central European the money to repay the principal and interest on its loans in August, together with an interest payment in February 2012. The promise came with a string attached, however: Ofer was to meet his obligations to Premium to give it the money first. The news, released as announcements to investors, calmed nerves.
Central European bond prices began going south recently, and two weeks ago, when Ofer died, the decline turned steep. On the day of his death the bonds fell by 19%. Ofer had met his obligations dating from June; the August payment went smoothly.
But now he's gone and there is nobody to take his place in continuing to reassure that Central European will repay its debts. That is why Central European bonds are trading deep in junk territory, at a yield of 80%. The next repayment to bondholders, NIS 44 million in August 2012, is in jeopardy. Ofer's heirs may be sitting pretty, but the same cannot be said of Central European's creditors.