Delek Real Estate's bondholders stand to lose as much as NIS 1 billion under a debt agreement hashed out with the company's leadership yesterday. The deal comes after a night-long meeting and five months of negotiations.

While a binding agreement remains pending, a head of agreement was signed yesterday afternoon at the company's offices in Ramat Gan. Under that deal, the bondholders are accepting a haircut of 25% to 50%. This means they stand to lose as much as half the NIS 1.6 billion they lent the company.

Delek Real Estate stock tumbled 9% yesterday on the news.

The company owes its bondholders about NIS 2.15 billion in total. But the arrangement reached yesterday applies only to holders of two debenture series, B4 and B5, who are owed NIS 1.6 billion in total. The holders of a third, shorter bond series have rejected the arrangement and will not be included.

The final agreement remains contingent on the support of the general bondholders assembly and Yitzhak Tshuva, the controlling shareholder of the Delek Group of companies. Shares of Delek Group gained 3.8% yesterday on brisk trading.

Under the guidelines set yesterday, the B4 and B5 bondholders stand to lose between NIS 500 million to NIS 1 billion. This means they're being given a haircut of 30% to 50% - they'll be getting back only 50% to 80% of the money they lent the company when they bought its debentures. (The figures relate to bondholders who bought at issuance. The few who bought later, when the bonds were at rock-bottom, are making a killing. )

Tshuva himself flew in from New York to Tel Aviv yesterday morning and is studying the arrangement reached with the bondholders.

The B4 bondholders were supposed to get back their principal, NIS 200 million, this May. The B5 bondholders are owed NIS 1.4 billion and were to get their money in installments from 2013 to 2019.

No agreement has been reached with holders of Delek Real Estate's B25 short-term bonds. They are owed NIS 600 million, about 28% of Delek Real Estate's total debt. The principal on that series, about NIS 300 million, was supposed to be paid in September 2011.

Representatives of the B25 bondholders are determined to get back 100% of their debt through the courts, though it's unclear whether they could achieve that, even through the company's liquidation.

Tshuva does it his way

Tshuva had spent months agonizing over Delek Real Estate, the weakest link in his sprawling business empire. He had gained a stellar reputation in market circles for standing behind his debt after a debacle with a high-tech fund called Green (see box ). That had involved big money, but Delek Real Estate involved four times as much, and he decided he would not personally bear the full debt to the bondholders, even though this would stain his pristine reputation.

But nor was he prepared to liquidate Delek Real Estate.

At no point has Tshuva given up on Delek Real Estate, which was led to default by massive, heavily leveraged international property purchases under the stewardship of its former CEO, Ilik Rozanski, who left the company two and a half years ago. The purchases were made before the global economic crisis began. In its aftermath, Delek Real Estate found the value of its property portfolio shrinking rapidly.

Yet yesterday as well, Tshuva said he believes the company can be turned around. "That is my way. That is how I have acted my whole life. I know no other way," he said.

The arrangement leaves Tshuva with a controlling interest, albeit a narrow one: 50.01%. No less than NIS 850 million of the company's debt to bondholders will be written off, but in exchange, the bondholders get 46% of Delek Real Estate's stock. The company's current market cap is NIS 45 million. Shareholders other than Tshuva will be diluted by 4%, which may explain Delek Real Estate's 11% drop on the Tel Aviv Stock Exchange yesterday: Investors sold before they could be diluted.

On the other hand, Delek Real Estate bonds rose 1.5% in trading yesterday.

Previous arrangements about Tshuva's contribution have been voided. The new agreement is that Tshuva will provide NIS 500 million in cash and NIS 500 million in collateral and guarantees.

The parties agreed yesterday that Tshuva's cash infusions and liabilities will be linked to the consumer price index.

Starting in 2017, private companies Tshuva controls will buy the 46% of Delek Real Estate the bondholders in four installments. They will be getting NIS 205 million for their share, which reflects a value of NIS 450 million for Delek Real Estate - 10 times the current market cap.

Haircut addiction

Knesset member Zahava Gal-On, who has been following developments at Delek Real Estate, commented yesterday that giving bondholders haircuts is an addiction: Once he does it once, the haircutter can't help going back for more. "As long as the institutional investors have memories like ants and repeatedly invest in leveraged companies belonging to tycoons like Tshuva, we'll continue to see haircuts at savers' expense," she said.

"The debt arrangement with Tshuva is the result of bad practice in which institutional investors repeatedly extend credit to companies that have been proven unable to repay their debt. This isn't just complacency, it's negligence due to conflicts of interest among the people managing our savings," Gal-On said.

The solution is to pass the Haircuts Bill she sponsored with Yitzhak Vaknin, she said.