Israel's Alon Blue Square Reaches $223 Million Debt Agreement

Creditors to wait five years for repayment.

Moti Milrod

Alon Blue Square, the parent company of the ailing supermarket chain Mega, won five years of debt relief from its own creditors Monday.

Banks and bondholders agreed to give the financially troubled holding company a five-year break from paying 96% of its debt, or 904 million shekels ($233 million). That will give Alon Blue Square time to sell off assets to raise cash and meet its 320 million shekels in financial obligations to help its Mega subsidiary, which negotiated its own debt accord in the summer.

Shares of Alon Blue Square, which have been in retreat for months as the group’s financial woes mounted over the summer and fall, closed 17.2% higher in Tel Aviv Stock Exchange, trading at 1.38 shekels.

The agreement still must be formally approved by all the parties involved, but Bank Hapoalim, the biggest of the creditors with 300 million in loans to Alon Blue Square, gave its backing to the debt accord.

The company said that the accord will enable it to meet all its debt obligation, including guarantees made to Mega’s suppliers. The retailer’s suppliers had frozen and reduced deliveries over the last week amid concerns about getting paid, but resumed them when Alon Blue Square pledged to cover Mega’s debt to them.

The bailout calls for unifying all the debt Alon Blue Square owes banks and bondholders and establishing a single repayment schedule for it. Creditors agreed to hold off getting repayments on 96% of the debt until 2020, but in the meantime will get interest payments equal to 5% annually, four fifths of it now and the rest in 2020.

In addition, the creditors will get 10% of Alon Blue Square shares to be allocated proportionate to the debt each holds, meaning 57% to the banks and the rest to bondholders. Alon Blue Square agreed to cut costs, including delisting its New York-traded shares and suspending dividend payments.

Alon Blue Square’s board last week approved selling its stake in Dor Alon Energy to its parent company Alon Israel Oil Company for 50 million shekels.

But as Alon Blue Square was tying up an agreement with creditors, Mega was running into new problems: Central Bottling Company, the Israeli Coca Cola bottler, was still at odds with the supermarket chain’s management over payment terms, and as of Monday evening it was not clear whether deliveries of Coca Cola and Tara dairy products would be made to Mega stores this morning.

That could leave Mega store shelves empty of popular products within a day in the case of Tara and two days in the case of soft drinks. Without Coca Cola, the retailer would struggle to prevent shoppers from going elsewhere for their purchases. Central Bottling declined to comment.

Sources speculated that Central Bottling might be playing hardball to get better payment terms from Mega, following the retailer’s statement that it would resume the terms that had been in force with all its suppliers before last July’s financial crisis forced it to pay in cash or with guarantees.

Other suppliers were reportedly not calmed by Monday’s debt agreement, but Tnuva, Strauss Group and Osem were expected to make deliveries to Mega. Smaller and medium-sized suppliers are more likely to hesitate, sources said.

One reason could be that the debt accord calls for Alon Blue Square not to increase its financial commitments to Mega beyond the 320 million it has already pledged. Since Alon Blue Square said it had already given the supermarket chain 230 million shekels of the amount, which leaves Mega with just a 90 millon-shekel lifeline.