Nochi Dankner - Michal Fattal
Nochi Dankner. Photo by Michal Fattal
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IDB Holding Corporation, the company at the top of Nochi Dankner's pyramidal business group, Wednesday posted the biggest loss in its history. And in another unhappy first, the company slid into an equity deficit: its liabilities have outstripped its assets.

As of September's end, IDB Holding had financial liabilities of NIS 2.19 billion and liquid assets of NIS 82 million. Ergo, its net financial debt totaled nearly NIS 2.11 billion.

On the upside, IDB Holding should be booking about a billion shekels in capital gains in the fourth quarter, from deals closed earlier this year.

Dankner, controlling shareholder and chairman of the IDB group, Israel's biggest conglomerate, was among the few Israeli businessmen to foresee the 2008 crisis. He prepared the group ahead of time by raising massive amounts of money through bond offerings.

Some of his moves since then have proven less prescient, such as investing in Las Vegas just before the U.S. real estate bust and returning for a second helping of Credit Suisse stock after making a fortune on the first round of speculation in the Swiss bank. Meanwhile, key companies were slammed by mounting competition and the worsening business environment - and on top of all that, the group had to shoulder heavy financing costs on the loans it had taken out.

Thus IDB Holding, which has a balance sheet worth some NIS 140 billion, wound up posting a loss of NIS 1.76 billion for the third quarter of 2011. That brought its loss for the first nine months of 2011 to more than NIS 3 billion.

For the third quarter of 2010, IDB Holding had reported a net loss of NIS 298 million and for January-September 2010, the holding company had posted profits of NIS 816 million.

This was the worst quarter in IDB's history, certainly since Nochi Dankner bought the controlling interest in the group together with the Livnat and Manor families in 2003. Almost all the companies in the top tiers of the IDB pyramid posted losses.

IDB Development (which was delisted from the Tel Aviv Stock Exchange: IDB Holding owns 100% of its stock ) posted a loss of NIS 1.7 billion. Discount Investment Corporation reported losing NIS 1.4 billion. Koor Industries, through which the group invested in Credit Suisse, posted a loss of NIS 1.6 billion and Clal Insurance lost NIS 201 million. Only Clal Industries reported a gain, netting NIS 230 million.

As the liabilities piled up

The ocean of red ink pushed IDB Holding into an equity deficit for the first time since Dankner bought the company. At year-end 2010, the company had shareholders equity of NIS 803 million. Now it has an equity deficit of NIS 1.1 billion, which means that's the amount by which its liabilities outstrip its assets in value.

Investors are notoriously a fickle lot, liable to violent swings in sentiment. On Wednesday, IDB Holding stock gained 8.6% while the Tel Aviv benchmarks gained about 4%. But bondholders cannot be sanguine: the group's bonds were trading at yields of about 16%, which is deep in junk territory, indicating they are not confident the company will repay them in full.

At present IDB Holding bonds have an A-minus rating with a negative outlook, which indicates (but does not assure ) a downgrade in the offing.

Maalot and Midroog, Israel's two credit rating agencies, refused to comment on Wednesday, saying only that they were watching.

Challenges to come

The holding companies at the top of the IDB pyramid have no activity of their own, and are dependent on being fed dividends to service their debts. That is a problem because the balance of profits available for distribution as dividends to IDB Holding shareholders at the end of September was a negative NIS 2.04 billion.

In other words, unless the court agrees to let the company reduce its capital, it can't pay dividends.

IDB Development's balance of profit available for distribution is a negative NIS 1.65 billion. At Discount Investment the figure is NIS 2.2 billion, and at Koor it's NIS 3.2 billion.

Only Clal Industries has a positive balance that it can distribute: NIS 9 million. Clal Insurance has a positive balance of NIS 770 million; however, because of regulatory constraints handed down by the Bank of Israel, it isn't clear how much Clal Insurance can give its shareholders in the years to come.

Meanwhile, IDB Holding locked in a $40 million credit line from an unnamed foreign bank. It also withdrew an NIS 64 million dividend at the last second from IDB Development, before the latter released its third-quarter statement and shifted to a negative balance for distribution. Hence it can make an NIS 67 million payment due to bondholders at year-end, which will leave it with liquid assets of NIS 229 million.

But come 2012, IDB Holding's financial challenges go up a notch: The company has to repay NIS 431 million, of which NIS 370 million goes to bondholders and the rest to the banks. Right now it doesn't have the cash, most of which it will need from June. The company may tap the markets, borrow more from banks, issue shares, and get the court's permission to withdraw more dividends from its companies.