After Deal to Erase Dankner’s Debt Fails, What Will the Banks Do?

TheMarker's expose of a dramatic Bank Leumi board meeting Friday afternoon put an end to the proposed Elsztain deal, which would have entailed Argentinian businessman Eduardo Elsztain contributing $75 million to Ganden Holdings, the company through which Nochi Dankner controls IDB Holding. This latest development will mean that Dankner's creditors will do whatever they can to extract as much money as possible from IDB.

• Bank Leumi announces it will not forgive Nochi Dankner's personal debt
• Bank Leumi wonders: Is Eduardo Elsztain pulling back from Nochi Dankner?
• Under public pressure, Bank Leumi agrees to suspend debt talks with Israeli tycoon
• The perfect banker who made the people loathe Bank Leumi
• Bondholders present plan to take control IDB Development
• Bondholders ready to take over IDB group if tycoon can't pay his debts, creditor says

It will be fairly complicated, as parties involved include banks and other financial institutions both large and small, some with collateral, others without. And even among those with collateral, there are huge differences. Only one thing is clear: Bank Leumi's decision to "exhaust all options in order to collect the debt" means that the relatively easy path Dankner has trod up until this point has come to an end.

The concept for a settlement which would have included a repayment of some of the money owed, a write-off of some of the debt, and spreading out payment on another portion over a few years in hopes that the remainder of the company would rise in value by then has been totally ruled out. This option was eliminated because there will be no new money injected into the company, and there is no point leaving the reins in the hands of someone who is unable to inject new money for a slew of companies that owe billions of shekels to banks and bondholders.

It could take days or weeks, but the immediate significance is that Nochi Dankner no longer controls IDB Holding, despite the fact that on Friday evening, he announced that the deal with Elsztain is "in force and going strong."

What does this mean for the creditors? That depends. We know that some of the banks hold guarantees from Dankner and his partners at Ganden, but the question remains: What can be done with these guarantees? That depends on legal proceedings, including asset seizures; piercing the corporate veil, which, if successful, would give creditors access to Dankner's personal assets; and, most importantly, transfer of control of IDB Holding to the courts. The banks are familiar with the procedure of appointing a receiver, who would administer the company with their interests in mind. In IDB's case, though, things are different because the  majority of the debt is owed to institutional financial firms.

Apparently, the present need is for all of those entities owed money to come together and decide on the best way for IDB to manage itself in the post-Dankner era. In reality, the differences between those individual entities and debtors are varied, making fast agreement and complete coordination difficult. That is one of the reasons the banks and other institutional financial entities seemed content with the Elsztain deal it would have allowed them to present the agreement as something that was secured by the skin of their teeth. Or, more accurately, with less of a loss than the other debtors would suffer.

There is no bottom line here, but the situation is slightly clearer and it looks like this:

1. The Elsztain deal is over.

2. The banks and other IDB creditors are taking the route of recourse to the law to take control of IDB.

3. The banks will try to exercise the personal guarantees provided by Dankner and his partners at Ganden.

4. IDB and Ganden's creditors' interests are not identical, and that fact will be only one of the difficulties facing IDB's receiver, who will have to try to maximize the company's profitability in order to pay back as much of the debt as possible.

Perhaps there is one bottom line: The public pressure applied to Bank Leumi played its part and forced the bank's board to recognize the fact that its decision to write off debt to a tycoon of Dankner's stature had far-reaching and significant ramifications.

This is a message to banks, businesses and the public at large. It appears the executives at Bank Leumi felt hurt by the dynamic that developed, and which was largely targeted at them (even though other banks have major exposure from Dankner's business). But the upside is that they are getting great power from the public to go after all of those in debt, regardless of their last names.