Azorim Struggles Under Debt

Azorim announced last week it completed a NIS 250 million rights issue to shareholders led by Leumi Partners Underwriters.

Two years after its rescue by Canadian investor Hershey Friedman, Azorim Investment Development & Construction Company is making strides toward financial stability. The company had been left in terrible shape by four years under the control of Shaya Boymelgreen when it indulged in the aggressive and highly leveraged acquisition of properties in Israel and Eastern Europe at inflated prices.

Azorim announced last week it completed a NIS 250 million rights issue to shareholders led by Leumi Partners Underwriters. To avoid dilution of their holdings, public shareholders fully subscribed and injected NIS 90 million, with the balance provided by Friedman: NIS 30 million plus the conversion of NIS 130 million in owners' loans to equity.

The loans had been made for the company to acquire Friedman's private properties in Poland and Israel - two pieces of land in Jerusalem - in the framework of a stakeholder deal that won almost unanimous approval by the shareholders at a general meeting.

The latest move will boost Azorim's equity to NIS 630 million, 20% of its NIS 3.1 billion balance sheet, a great improvement over the less than 10% at the end of 2010. Azorim also announced that completion of the purchase of a 9% stake held by the Migdal Insurance & Financial Holdings group in its closely held Azorim Construction and Azorim Real Estate ACRL subsidiaries for NIS 136 million is being held off a month to the end of February.

If the deal doesn't go through, Migdal will now be entitled to NIS 25 million compensation rather than NIS 10 million. Ofir Greenberg stepped down this week as CEO and will be reaplced by Dror Nagal, an insurance executive. Heavy financing costs At the end of September, Azorim group had NIS 1.5 billion in financial debt, NIS 670 million in bonds and NIS 300 million in bank loans to subsidiaries, with the balance on income-generating properties, land and its inventory of completed housing units.

These liabilities have entailed heavy financing expenses, with just the interest coming to NIS 100 million a year. So despite ample gross profits, leverage has made it hard for Azorim to generate enough funds from operations to provide sufficient debt coverage, which has also affected the bottom line. Azorim had NIS 256 million in cash resources as of September, but NIS 160 million of this was in project accounts that lending banks prevent from being withdrawn until the projects are completed and the housing units handed over to customers.

The rights issue brought in NIS 120 million but, with about NIS 300 million in repayments on principal coming due this year to bondholders and banks, Azorim is looking to raise up to NIS 250 million in bonds in an offering led by Leumi Partners Underwriters and Leader Underwriters. Azorim's Series 8 bonds, with 31-month terms, have risen 24% since last August and are now trading at a relatively low 4.28% yield to maturity, a 44 basis-point spread over similar government bonds.

The low yield, which is expected to help Azorim raise debt at reasonable interest, also indicates that besides the company's improved operational performance, the capital market can't ignore the fact Friedman continues providing it with a financial safety net.

This is in stark contrast to the blight of debt restructurings and heavy-handed haircuts facing investors nowadays, or foreign real estate magnates of yesteryear like Boymelgreen and Ziel Feldman. It seems Friedman hasn't any intention of milking dividends from Azorim during the next few years.

The new management has made a series of moves to put the company back on track by increasing its profitability, generating a steady cash flow, and reducing leverage. But it still has a ways to go: In the first three quarters of 2012, NIS 133 million in gross profit was eaten away by high interest expenses to eke out just NIS 44 million in net income. Handsome profit ahead In its core business, apartment construction, Azorim currently has 2,000 units in development, of which 1,100 are already sold for over

David Bachar and Kobi Kantor