Capital Market / Maalot downgrades Azrieli's holding company to AA-

Maalot S&P on Wednesday downgraded Kanit Management, Investment and Finance by one notch to AA-. On the bright side, the outlook for Kanit, which is controlled by David Azrieli's business group, is stable, which means the credit rating agency doesn't see another downgrade in the offing. Also, Maalot took Kanit off its watch list.

Kanit owes bondholders NIS 700 million.

"The downgrade reflects the influence of the group's non-core investments on its business and financial profile, and on management attention," wrote the agency analysts, Osnat Jaeger and Nitzan Magidish. Although Kanit's activity in yield-generating real-estate remains steady, the company's exposure through its heavily-leveraged subsidiary Granite Hacarmel, and other investments, weakens its overall credit profile, they stated.

Kanit is presently heading for its first offerings of shares to the general public, according to a company valuation of NIS 8 billion.

The company owns five malls in Israel, in full or in part. The list includes the Ayalon Mall in Ramat Gan, the Negev mall in Be'er Sheva, the Givatayim Mall and the Jerusalem Mall, all of which it fully owns. It also owns 60% of the Holon Mall.

Its financial holdings include 20% of Leumi Card and 4.8% of Bank Leumi itself.

Maalot projects that Israel's banking sector represents relatively low risk, among Kanit's various investments. However, the analysts surmise that Kanit's investment in shares, especially non-controlling shares, is inherently high-risk. Also, Bank Leumi isn't expected to pay shareholders high dividends in the next couple of years, which intensifies the risk in the short run.

On the upside, the Maalot analysts applaud the quality of Kanit's portfolio of yield-generating properties. The assets are worth about NIS 10.3 billion, and generate 60% of the company's Ebitda (earnings before interest, taxes, depreciation and amortization). Over time the properties have boasted high occupancy rates and also generate high rental income, compared with the competition.

On the flip side, Jaeger and Magidish say that Kanit's business profile has been negatively affected by increasing investment in land, ahead of increasing construction activity.

Despite Kanit's financial soundness, Maalot feels that the company's liquidity situation has deteriorated somewhat, following a significant drop in cash, due to several transactions financed by short-term credit. That said, Jaeger and Magidish write that they "feel comfortable" with the company's liquidity, given its ongoing cash flow, good debt scheduling, and mainly, NIS 4 billion worth of assets with no attachments.

Kanit has NIS 150 million worth of signed credit lines, and estimated annual cash flow of NIS 300-400 million to repay debt. Maalot is satisfied that these resources should suffice to repay any debt to bondholders and bankers.