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Ellern Investments' bondholders are fighting mad. In February, the company issued NIS 50 million bonds to finance investments in infrastructure and real estate projects. Four months later, the first news of the company's face-lift hit the street as it became the controlling shareholder of Bank Hapoalim, Dor Chemicals and Dankner Investments following a complex transaction.

Those who were present at Ellern's capital market presentation feel terrible. They recall the hour-long explanation, accompanied by pictures of infrastructure tenders, tourist parks and real estate development projects, but now they suddenly find themselves financing the Dankner family's personal loan repayment.

The glossy brochure accompanying the presentation included details of the potential for Israel's water sector - a desalination plant in Ashkelon and the draining of a swamp. Israel's electricity production potential, the sale of steam to a secret defense contractor, the special design of the Costa Del Sol project in Spain, and Eilat's City of Angels also decorated the pages of the brochure. Other than mentioning some interest in establishing another central area of expertise, there isn't even the smallest hint at what would happen over the next few months.

Even if management really didn't know at the time what the future was about to bring, the bondholders' lack of concern appears odd.

A senior capital market manager said that at the time, Ellern had cash in its kitty and investors asked why they wanted more. The answer was unequivocal. The company explained it needed cash to finance projects it had already won and to bid on more tenders. "Had we known in advance what they would do with the funds, they wouldn't have received a penny from us, even at twice the interest," the manager said. The greatest damage, he said, is from sky-rocketing yields due to the high risk involved in Ellern's new business.

The February prospectus described Ellern as a company that invests in real estate in Israel and abroad, invests in infrastructure projects, and is involved in government tenders. The company had a shareholders' equity of NIS 131 million that financed a NIS 264 million balance sheet. Based on the prospectus for a rights issue two weeks ago, Ellern has become an extremely leveraged company with NIS 50 million in equity - after the rights issue - financing a balance sheet of nearly NIS 5 billion.

Legally, there is no obligation to ask debt holders what they think of the deal. However, many of the creditors - for example, the banks - have been involved in each stage of the deal. But no member of the Dankner family asked the bondholders for their opinion.

Since the Ellern deal was reported in the press, the company's bond price has nose-dived and its annual yield is already at 14 percent. While market players are asking themselves questions on the moral level, a few are looking into what can be done legally. One such question is whether a substantial change in a company's balance sheet and business model is fair to bondholders who bought an entirely different cup of tea just a few months ago.

Most bondholders prefer to remain anonymous, but their discomfort with Ellern's face-lift and its much more problematic repayment capability cannot be ignored. One convertible bond fund manager said yesterday that he recognized a serious problem the moment he read the first press reports on the Dankner family's interest in the deal. "A week later, I dumped my whole lot of Ellern bonds. The bonds essentially become secondary equity and will finance the leveraged deal." He said that while bondholders are exposed to the same risks as shareholders, they would not benefit, as shareholders would, from a future divided if everything works out. According to the manager, anyone who wants in on a deal like this is much better off buying the stock than the bond.

He said the Dankners have created an entirely different company than the one in the presentation. Before the bond issue, they designated the money for infrastructure investments and not for the purchase of Bank Hapoalim.

A portfolio manager said that if the deal succeeds, it could be great because the huge leverage could provide very high returns, boosting the share sky-high and making the conversion a very good deal. But he called the deal scary and risky.

Another manager said there is no dispute that the bondholders' risk increased due to the deal. "This is also a reason for the rise in yield," he said.

He noted the prices of the assets transferred into Ellern are higher than their market values. Nonetheless, he said it is hard to judge the deal from the current market low-point, and events over the next two to three years will have to be monitored. "Other corporate bonds plummeted too," he said.

He predicted that despite the substantial change, Ellern can service its debt to bondholders.