Despite double-digit yields, S&P Maalot sticks to A-minus rating on IDB bonds
All bond series of the two top holding companies in Nochi Dankner's IDB pyramid, IDB Holding Corp and IDB Development Corp, are now trading at double-digit yields, as high as 37%.
The plunge by IDB group bonds this week, until Tuesday's upward correction, has been the buzz of the financial district. Speculation by investment managers, analysts and capital market brass is flying in all directions on reasons for the steep drop in value - and the possible implications.
Even after the correction, all bond series of the two top holding companies in Nochi Dankner's IDB pyramid, IDB Holding Corp and IDB Development Corp, are now trading at double-digit yields, as high as 37%. That is deep, deep into junk territory.
Only the S&P Maalot credit rating agency, however, seems unperturbed by the incongruity of the IDB bonds having an investment-grade rating of A-minus - the same rating given to bonds of Eliezer Fishman's Jerusalem Economic Corp, that are trading at yields no higher than 8%, for example.
The absurdity of IDB's debt rating is underscored by the fact that the NIS 133 million, short-term B10 bond series of Gadot Biochemical Industries (see story this page ) is trading at a yields of 14.7% to maturity and ranked by Maalot at BB plus, four notches lower than IDB Holding's even shorter B4 series that on Monday reached a 37% yield.
Maalot's rating has another implication: A minus is the lowest rank of bonds that can be held by exchange-traded certificates that shadow the indexes. The securities must be offloaded by these investment devices the moment they are downgraded to less than A minus.
IDB bonds are currently included in indexes such as the Tel-Bond 60 and Tel-Bond Shekel, and raise the yields of these indexes accordingly. The yield reflected by the Tel-Bond 60 is 7% nowadays, but would be lower if IDB bonds were downgraded and forced out of the index.
The loan-to-value ratio of IDB Holding is now estimated at 116%, meaning its total debt is 16% higher than its overall assets. IDB Development's LTV ratio is estimated at around 100%, so under an optimistic scenario it might be expected to repay all its debt.
Under these assumptions, the capital market surmises that holding or opening a position in IDB Holding bonds is riskier than doing so with IDB Development bonds, and in any case quite risky in itself. Chances of the asset value rising over a short period do not seem too promising at this point, and for IDB Holding to recycle its debt, its LTV ratio needs to fall to the range of 70%. The company is still trading,
however, at a market value of NIS 1.08 billion, reflecting an option at a high exercise price for market recovery and the completion of asset sell-offs totaling several billion shekels that IDB is currently pursuing.
"IDB Holding bondholders need to pray for some sort of miracle, while IDB Development bondholders merely need to hope that nothing negative from their point of view occurs," said a senior institutional source.
"If the banks allow him, it would be better for Dankner to try and complete his asset sell-offs and play for time. Dankner's game isn't over, but the time he has remaining has shortened considerably."