Why bondholders are nervous

During the good times, the corporate bond market exploded. Every piddling firm could raise millions upon millions, never mind what it did. Now chastened chickens are coming home to roost and NIS 1.4 billion of the investing public's debt hangs in the balance.

PMS Group has been sending depressing messages to investors all week, and Monday it officially joined the black list. Kaupthing Bank Sverige, which financed part of the company's operations, has become the direct owner of all the company's assets. That concludes the bad news for the company's shareholders, but this is only the beginning for its bondholders: PMS has announced it will not be able to meet its obligations.

Many other publicly traded companies have defaulted, including Carmel Holdings, Afik Hayarden Holdings, Direct Capital and Oren Investments.

Last Thursday Carmel's bondholders held a meeting to approve an arrangement proposed by the company, which included waiving part of the debt and postponing payments.

As a result, the NIS 15 million payment of principal and interest due this month has been canceled, and the controlling shareholders have agreed to infuse the company with NIS 8 million, in exchange for more shares.

The bondholders realized they were better off supporting the agreement: Carmel owes them a total of NIS 56 million.

The company finished the first nine months of the year with NIS 26.5 million in losses - double its losses for the parallel period in 2007. Carmel will give back NIS 14 million cash to bondholders, who have to forgo NIS 14.9 million. In addition, the company has promised not to disburse dividends in 2009-2010, and to limit 2011-1012 dividends to 25% of profit left after paying the principal and interest payments due on its bonds.

In exchange for approving the terms of the arrangement, bondholders got a lien on Carmel's rights in two real estate partnerships.

Afik, which owns real estate projects in Romania, announced that the first payment to its Series B bondholders, who lent the company a total of NIS 56 million, will be postponed due to deals that fell through. The company is planning to meet with the bondholders to discuss rescheduling its debt.

Globalicom Trade (formerly Milomor Trade) issued a going concern warning along with its third-quarter report last Wednesday, shortly after midnight, as it admitted to losses of NIS 11.5 million. A week earlier the company, which provides cellular communications services in Romania, had announced it would have difficulty repaying investors.

"In light of continued losses and a shareholders equity deficit, the company won't be able to pay bondholders on time," stated the introduction to Globalicom's third-quarter report. The company is asking bondholders to agree to have their payment postponed for a year, and in exchange CEO Isaac Waldman will transfer half of his 27% stake in the company to a trustee as collateral.

Another company whose third-quarter report includes a going concern warning is Direct Capital, which operates mainly in the real estate sector in the former Yugoslavian states. Two weeks ago, even before the publication of its quarterly statement, the company told investors it would not be able to meet its obligations. Direct Capital was supposed to pay bondholders NIS 17 million at the end of this month.

Last week CEO Arie Prashkovsky announced the company would be delaying payment.

"The company intends to pay the interest, but if we repay the principal too, the company will be left with too little cash to function properly," said Prashkovsky. "The company intends to repay the principal at a later date."

On Sunday, however, Direct Capital announced it would not be paying interest, either, because its cash reserves were down to NIS 3 million, and the previous Thursday the Bank of Israel had refused to release a NIS 4.75 million deposit securing a loan taken by a Direct Capital subsidiary to buy back bonds in the parent company.

Direct Capital has still not disclosed when, if at all, it will repay its debt to investors.

Oren Investments, formerly Naot Magor, was supposed to repay 33% of its Series B1 bonds in November, but a NIS 20 million structured deposit in Germany, through BHF Bank, caused it heavy losses.

Last heard, that investment was worth NIS 12.6 million and it can't get rid of the dog: BHF says there's no trading in that deposit security. The company was left with NIS 5 million cash, and owed bondholders NIS 13 million in November. Oren did pay the interest and 40% of the owed principal.

The company has two other bond series, C2 convertible bonds and B3 straight bonds. Those are secured by money it raised and put into a special account, which had been earmarked for construction and new investments. That money can't be used to repay the B1 bonds. In distress, Oren is seeking a partner and is in negotiations with the Weill group, which used to own a stake in Osem. The new shareholders are expected to inject NIS 10 million, which would allow Oren to make its B1 payments.

Oren's main asset is land near Jerusalem's Ben Yehuda market that is slated for residential and commercial development. It also owns land in Tel Aviv and Holon. Still, the company had a going concern warning in its third-quarter report after losing NIS 16 million in that quarter. Revenues shrank to NIS 119 million, from NIS 885 million in the corresponding period of 2007.

A year and a half ago there was so much cash in the air that people were searching for places to invest. That was how the late Eli Bardugo raised money for Ofek Real Estate, which failed after Bardugo, the chairman, died in April. Since then the two companies he established - Dadeland Towers and Ofek - have been going downhill, and their payments to bondholders have been suspended.

Dadeland was a one-project company that bought land in Florida for $35 million a year and a half ago, and had planned to obtain bank financing to start building. That was when the credit crisis erupted. Then the controlling shareholder died and the bondholders lost all confidence in their investment. To add to their troubles, there is a lien on the land, favoring an American bank, so even if the land is sold, not much will remain to repay the bondholders.

Ofek's story is similar, and its bondholders are also unlikely to recoup their investment. If there are no fundamental changes at these companies, they will probably not survive.