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The draft arrangement Africa Israel Investments reached with its bondholders two weeks ago could fall apart, because of changes that the banks insist in the terms of agreement. The problem is conflicts between the accord between Africa Israel and its bondholders, and the agreement that the company's controlling shareholder Lev Leviev reached yesterday with the banks about his own debts.

Yesterday after negotiations with Africa Israel collapsed, representatives of the major bondholders called an urgent meeting with the company's management and announced they reject the changes the banks demand. There was no meeting of minds, however, and Africa Israel CEO Izzy Cohen left before the gathering disbanded.

The banks, for their part. profess astonishment at the turn of events, saying that Leviev should have begun his moves by reaching an agreement with them, and only then gone to negotiate with the company's bondholders. The banks have rights to his shares in Africa Israel, one banker pointed out.

"I don't believe it will fall apart. It's in everybody's interests for it to stay alive," said a banking sector source said yesterday. "It isn't in the institutionals' interest to liquidate Africa Israel. They're just flexing muscles."

Sources in the know yesterday blamed Eli Yones, chief executive of Bank Mizrahi-Tefahot. "Yones is the most aggressive of all the bankers. He could lead Africa Israel to liquidation," said one source.

Leviev's personal agreement with the banks was made on behalf of his private company Memorand, through which he owns the controlling interest in Africa Israel.

Memorand's agreement with the banks consists of two parts. The first is with Bank Hapoalim, which it owes more than NIS 2 billion. The second is with all the other big banks in Israel, to which it owes a billion shekels.

The problem was these other big banks, which demanded terms that conflict with Africa Israel's agreement with the bondholders. As said, the representatives of the big institutional investors holding Africa Israel bonds (Psagot, Clal Insurance, Harel, Menora-Mivtachim and Migdal) met yesterday and rejected the banks' demands.

A paper TheMarker has obtained shows that every single Africa Israel share Memorand owns (75% o the company) is attached in favor of the banks. Even after the arrangement with the bondholders all the Africa Israel shares remaining in Memorand's possession would be attached.

Hence the banks oppose the limitations that the bondholders would force on the company. For instance, Leviev had to undertake not to allow his holding in Africa Israel to drop below 45% until he'd injected NIS 500 million into the company (he's promised to infuse NIS 750 million over four years). After he's infused the half-billion shekels, he can lower his stake to 33%, not less. If Leviev breaches these terms, the bondholders can recall their debt.

No, say the banks. They want the freedom to force Leviev to sell the shares. They have attachments to the shares anyway and could exercise their rights. Effectively, the banks' position conflicts with the bondholders' demand.

More irritating to the bondholders is the banks' refusal to let the bondholders take possession of any of Leviev's shares even if he fails to inject the money he pledged into Africa Israel. Leviev should keep the shares and the bondholders should settle for dividends, say the banks.

The banks also demand the option of injecting money into Africa Israel themselves if Memorand doesn't. That means the bondholders could find themselves in bed with a new partner - the banks instead of Leviev. Ostensibly that shouldn't be a problem. But it could be if the representatives of all the banks start to squabble, making the giant real estate company unmanageable.

Sources at the banks point out that all the changes they demand in Africa Israel's agreement with the bondholders are based on Leviev's own agreement with them.

While the bondholders are bucking, the banks are holding firm. "We are not at war," said one banker. "We have rights to the shares and there's no reason for us to waive them."

The institutional investors are outraged, however. "Some of the money Leviev is handing over to the banks isn't to repay future debt, it's because Memorand was late in its payments to them," claimed one.

No comment could be obtained from Leviev or his people as of press time.