IDB Development Corp was hit with a downgrade by the Standard & Poor's Maalot credit rating agency on Thursday.

The company, controlled by Nochi Dankner, was downgraded from BB to B. On the upside it was also removed from the negative credit watch list, which it had been on since 19 September 2012. But the downside is S&P Maalot determined has it on negative credit watch.

IDB Development's liquidity profile has weakened further, Maalot explains. The agency anticipates IDB Development will be a billion shekels short of the cash it needs in 2014, and could breach its financial covenants as soon as late 2013, on account of bank debt totaling NIS 2.1 billion."
According to Maalot, since they put IDB Development 's on the watch list, the company failed to significantly reduce the discrepancy between estimated cash flow to debt it has to repay in 2014.

Likewise, Maalot is concerned that IDB Development has yet to reach new agreements regarding key financial covenants that it is liable to violate this year.

IDB Development is having difficulty taking dividends from two holding companies below it in the IDB group hierarchy, Discount Investment Corporation and Koor Industries. Given its rickety financial condition, the only way to bridge the gap between its financing needs and its estimated cash flow is by divestiture.

"In light of its high leverage of 130 percent we cannot rule out a going concern warning in the company's financial statements since 2013, which could lead to its downgrade to CC – the last stage before Default," Maalot writes.

Maalot clarifies that it sees the insider transaction taking shape, for Koor Industries to buy Clal Insurance from its sister company as a good thing. But given that this is an insider transaction, and considering public sentiment, approving the deal will be complicated. Moreover, the deal might not be done in time, Maalot observes, so it isn't in the liquidity analysis.

IDB Development bondholders might also take steps frustrating the company's intentions, Maalot warns.

Maalot estimates that the company will run out of cash by the end of March 2014. Its cash position, plus dividends and management fees it should collect, and any revenues from selling assets should suffice - through February of that year.

The agency foresees IDB Development potentially violating the covenant to keep enough cah handy to cover two quarters' worth of principal and interest. It's short NIS 500 million in order to meet this stipulation at the end of the third quarter of 2013, warns the agency.

"IDB is dependent upon the willingness of the banking system to change conditions or refinance debt on a large scale," the agency frowns.

In short Maalot could downgrade the company again within three months if its basic liquidity scenario points to a cash deficit within the next 12 months, or if the company does not make significant progress with asset selloffs, including that of Clal Insurance, and does not work with the banks to change its financial covenants.