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After raising NIS 50 million a year and a half ago in a private bond issue, Egged is returning to the capital market: The bus cooperative plans to raise a further NIS 70 million in another private bond issue, and the funds will be used exclusively for repaying Egged's debts. The issue is being handled by Poalim IBI, Clal Finances Underwriting and Gmul Sahar Underwriting.

Maalot, the Israel rating firm, yesterday published a report that grants Egged a -AA rating. The cooperative's financial vice president, Ofer Linchevski, said that the money raised from the bonds will replace its current bank financing, thereby turning the capital market into a strategic financial alternative for Egged.

Bond issue preparations include the attachment of Egged's Hof Hacarmel station, the new central bus station that was opened in southern Haifa next to the city's train station. The cash flow received from commercial space rental at the station, NIS 11.8 million annually, will also be applied to debt repayment. An evaluation by assessor Ehud Hameiri valued the station at NIS 127 million.

Maalot's report reveals a few interesting details about Egged. For example, the cooperative has an equity deficit twice as great as the value of its assets, which translates to a deficit of NIS 1.8 billion. Maalot's analysts wrote that most of the deficit stems from the retirement of cooperative members and cumulative losses during the latter half of the 1980s. In the past decade, Egged turned a net profit with the exception of 1995, the report said.

Linchevski said 4,000 buses that Egged owns are not recorded in the books at their real value. If that were the case, the real deficit is just NIS 700 million. Maalot's report also stated that a large share of the cooperative members' eligibility for redeeming shares is expected to be covered by the state over a 25-year period. In exchange for government assistance, the state will be given the right to shares worth up to 25 percent of Egged's worth if they are ever issued.

Egged's annual revenues are about NIS 2.5 billion, including NIS 650 million in state subsidies - NIS 450 million for discounts granted to the population's weaker sectors and NIS 200 million to finance unprofitable lines.

Between 2001-2003, the security situation caused a drop in Egged's revenues and an increase in its financial debt, pushing operational cash flow into reverse. Egged returned to significant positive cash flow last year thanks to an improvement in the security situation and increased subsidies.

Maalot said the demand for public bus transportation has suffered from the security situation. Still, the rating firm believes this negative influence has been mitigated by the continuous demand by various sectors of the population that are dependent on public transportation. Maalot believes plans to extend railway lines and build a light rail system will negatively affect public bus use. Still, greater use of trains is expected to increase the use of public transportation in general, as well as the demand by travelers who will take buses to get to and from train stations. In addition, Egged is expanding operations to other areas, including participation in the light rail lines in Tel Aviv and Jerusalem.

Egged is trying to reduce its cooperative membership in order to reduce wage costs. Linchevski said that in the past two years, some 1,000 members have retired, and that by 2010, many more will follow. The cooperative's savings due to retirements is twofold - Egged is hiring fewer new bus drivers than those retiring, and the cost of a salaried driver is about one third that of a retiring member.

Egged operates about 1,300 bus lines throughout the country, using its own buses and infrastructure, which includes parking lots, garages and stations. In 1999, the Transportation Ministry began implementing reforms in public transportation, including the gradual removal of several lines from the Egged and Dan cooperatives. These lines are being transfered via tenders to private companies. In keeping with an agreement signed between Egged and the state, there will be competition on a maximum of 25 percent of the public bus lines by 2009 as defined by the number of driving hours in March 1999. Thus far, operators that have won tenders control 8.7 percent of Egged's past operations. Bus fares on those lines are 25-50 percent less expensive than Egged's previous fares for the same lines.