Discount extends fresh loans to Delek Real Estate

Delek Real Estate is showing signs of recovery, and Israel Discount Bank has been enlisted to help them survive by extending loans totaling several hundred million shekels.

Discount is thus joining parent company Delek Group and the Phoenix insurance group, both of which belong to Yitzhak Tshuva, in lending Delek Real Estate money to cover its billions of shekels in debts to bondholders, banks and other creditors.

In June Delek Real Estate reached a five-year debt arrangement (covering both new and old loans) with Discount. The bank, headed by CEO Giora Offer, agreed to allow Delek Real Estate to pay only interest during the first two years, and to start paying off the principal in the third year.

Delek Real Estate now owes NIS 616 million to Discount. Capital market analysts figure that NIS 200 million of this is new loans.

After arranging its debts to Discount, Delek Real Estate is now negotiating with Bank Hapoalim and Bank Leumi regarding NIS 161 million in outstanding loans.

Delek Real Estate will be able to choose a combination of various types of loans from Discount: on-call, long-term loans; in shekels or in foreign currency.

The company notes in its financial report that these loans will carry annual interest of 2.5%, plus Discount's costs in raising the money for the loans and any charges connected with foreign currency loans, such that the effective interest will be about 5%.

Delek Real Estate finished the second quarter of 2009 with NIS 38.4 million in net profit, up from losses of NIS 105.4 million in the parallel quarter of last year.

Under the new debt arrangement, Delek Real Estate has undertaken to meet the following financial covenants: minimum shareholders equity of NIS 1 billion; a ratio of at least 2.75 between the value of the collateralized shares and the remaining debt; maintaining a minimal debt to market value ratio (financial obligations plus shareholder equity plus deferred tax obligations), minus the liquid portfolio and excluding non-recourse loans, of up to 70%; and maintaining shareholder equity for subsidiary Delek Global Real Estate of at least 12% of its assets. Delek Real Estate is so far complying with these covenants.

Meanwhile, investors are smiling on bond offerings again, and have regained much confidence in Delek Real Estate. Its bonds have been trading at yields of 8.5%-12.5%. Given these developments, Delek Real Estate is apparently considering raising more money by issuing a new series of straight (non-convertible) bonds, or possibly convertible bonds, or a combination of the two, with average durations until maturity of 3-5 years.

Another option being considered is the expansion of existing bond series.

In the past few weeks outgoing Delek Real Estate CEO Ilik Rozanski has been meeting with officials from the securities ratings companies, institutional investors and underwriters, in an effort to advance the fund-raising process.

The bond issue is expected to be led by a consortium of underwriters headed by Hapoalim IBI Underwriting, Menorah Underwriting and Clal Finances Underwriting.

The final sum as not yet been set, but will likely be NIS 100 million-NIS 200 million and will be used by Delek Real Estate to recycle existing loans.

As of June 30, 2009, Delek Real Estate and its fully-owned subsidiaries had NIS 524 million in cash and cash equivalents. By the end of 2010 Delek Real Estate must repay banks and bondholders NIS 665 million, and plans to meet these obligations by borrowing from financial institutions and its own subsidiaries (shareholder's loans), by selling off assets and by generating income.

Delek Real Estate's share price has risen 152% since the beginning of the year reducing its market cap to NIS 1.12 billion.

No comment could be obtained from Delek Real Estate for this article.