Will March 8, 2020 go down in history as the day Yitzhak Tshuva, the last tycoon standing on the Tel Aviv Stock Exchange, began the path to bankruptcy?
The bonds of his energy-focused holding company, Delek Group, extended their declines Sunday and again Monday as the global price of oil dropped. The yield on its bonds fell as much as 10.5% on Sunday and on Monday dropped another 23% to yields as high as 127%.
That means investors have a real fear that Delek Group will not be able to repay its debt or, at the least, will seek a bailout, said Guy Nissenson, chairman of the Yetsira Investment House.
“In the debt accord for Delek Real Estate in 2012, the public took a haircut of 60%, or 2.15 billion shekels [$610 million at current exchange rates]. Less than three years later, Tshuva raised 400 million shekels for Delek Group from those same institutions,” Nissenson recalled, saying he was certain that the group would now seek a bailout.
Tshuva, who began as a small-scale building contractor, was Israel’s 10th-wealthiest person, according to an estimate by TheMarker. His empire once straddled a wide array of businesses, but in recent years he has focused on energy, expanding his holdings out of Israel to include North Sea oil.
Among the tycoons that once lorded over Israeli business and capital markets, Tshuva is one of the few left – thanks largely to his investments in Israeli natural gas.
Delek Group shares, meanwhile, plunged 31% on Sunday and another 24% on Monday to 146.10 shekels, marking a drop of 72% since the start of the year. The company’s market capitalization is now just 1.75 billion shekels.
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Delek Drilling, the unit that controls the group’s Israeli natural gas holdings, tumbled 13.8% on Sunday and another 16.2% on Monday to end at 3.61 shekels, bringing its year-to-date decline to 59%. The company is worth just 4.2 billion shekels on the TASE.
The market’s main worry is the price of oil, which will weigh on the future cash flows of Delek and its subsidiaries, its ability to sell its energy assets at attractive prices and the ability of the subsidiaries to pay dividends they have promised investors. The declining value of its energy assets will lead to losses for Delek Group as the value of its shareholders’ equity declines. That in turn will increase its leverage and risk its credit rating falling.
On Monday, the news on oil prices got worse after Saudi Arabia announced the day before it would step up production after OPEC and its allies failed to agree on production cuts. Brent crude futures were down by as much as 31% to $31.02 on Monday, their lowest level in more than four years.
“Delek Group is on the way to another debt accord on a scale that will dwarf the arrangement he made eight years ago,” Nissenson said. “The group is leveraged to a crazy and irresponsible degree courtesy of the public’s pension money and savings. Any institution that agrees to a debt accord and concedes another shekel to Tshuva is a sucker.”
Delek’s main problem is that falling energy prices will reduce the value of the company’s two main assets – its 100%-owned Ithaca Energy unit, a North Sea oil producer that recently acquired assets from Chevron for $2.3 billion, and its 60%-owned Delek Drilling unit, which has stakes in Israel’s Leviathan and Tamar gas fields.
“The Delek Group story is simple and derives from its underlying assets,” said a fund manager who asked not to be named. “Delek Drilling is a traded security and its market cap is based on Tamar and Leviathan. It’s not at all complicated to figure out Ithaca’s valuation because there’s a cash flow report that Delek issues. If you input the current price of oil, you see that Ithaca is worth less than its debt.
“So the question of whether the net asset value for Delek Group is positive or negative is now relevant,” he said. NAV is the value of a company after subtracting its debt from the value of its assets.
The main issue is the value of Ithaca together with the Chevron assets. Ithaca is listed in Delek’s books as at a valuation of $1.4 billion, which is based on assumptions about its future cash flow. In the worst-case scenario, if the cash that Ithaca generates is less than its debt, its value will drop considerably. Delek Group’s NAV could turn negative to the tune of several hundred million shekels.
Delek acted Sunday afternoon to calm investors by voluntarily releasing a cash flow forecast for the next six years. The report was made on conservative assumptions – no rolling over of debt, no equity offerings in Ithaca, low oil prices and minimal cash flow from subsidiaries.
The company also revealed a plan to take a long-term loan from an unnamed financial institution for
$270 million against projected cash flow from royalties generated from the Leviathan and smaller Karish field (to which it retained some rights after selling it). As Monday’s market showed, the disclosure had little effect.