Delek Group Credit Rating Slashed, Raising Specter of a Debt Bailout

Midroog lowers Yitzhak Tshuva’s holding group’s rating by 15 notches

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Delek Group tycoon Yitzhak Tshuva.
Delek Group tycoon Yitzhak Tshuva.Credit: David Bachar

Delek Group, the holding company controlled by Yitzhak Tshuva, one of Israel’s last remaining tycoons, looked as if it was moving toward a giant debt bailout after a credit agency lowered its rating an unusually large 15 notches on Monday.

Midroog said it was downgrading Delek debt to Ca from a previous A2. A Ca rating reflects an insolvency event. Midroog economists attributed their decision to expectations for a “repayment failure at a high level of certainty.”

The move represents an aggressive downgrade that demonstrates the rapid deterioration of Delek, which only four months earlier had completed the $2 billion acquisition North Sea oil assets from the U.S. company Chevron.

Delek shares, which have plummeted in recent weeks, tumbled 40.8% in response to the downgrade to close at 77 shekels ($20.98) in Tel Aviv Stock Exchange trading.

The rating agency noted that Delek’s liquidity and financial flexibility had deteriorated in the weeks since the coronavirus pandemic had created an economic and financial crisis.

“The coronavirus epidemic has led to a slowdown in global economic activity and a decline in demand for energy products and at the same time that the figure to reach an agreement between OPEC-plus members on the production cuts has led to a sharp decline in oil prices,” said Midroog.

Analysts Kobe Rahmani, Liat Kadish and Sigal Issachar pointed to the sharp drop in the valuations of two Delek holdings – Delek Drilling, which controls the group’s Israeli energy assets, and Ithaca Energy, which controls its North Sea holdings.

Shares of Delek Drilling have fallen 60% on the TASE this year. Midroog believes that closely held Ithaca’s valuation has dropped due to its exposure to world oil prices and the drop in valuations of peer companies overseas.

“These events have created under a high level of uncertainty about the ability of Delek to recycle debt, to complete asset sales and to exercise the same level of financial flexibility that it had on the eve of the crisis,” the Midroog report said.

Midroog also noted that Delek Group’s liquid assets dropped significantly because its bank credit lines were reduced as the value of its collateral dropped and because the group repaid bond debt that was coming due.

The agency acknowledged Delek was working to divest assets to raise cash, but it expressed concern that the group would not be able to meet a 120 million shekel payment to holders of its yud-gimmel bonds due at the end of March. It also said that Delek’s financial flexibility had been eroded by the 1.7 billion shekels it had contributed from its own cash to the purchase of the Chevron assets, as well as the $200 million loan it took from the bank BNP to complete the purchase.

Midroog’s downgrade could have major implications for Delek. For instance, the covenant covering its lamed-aleph and lamed-daled bonds state that if its credit rating falls below BBB- minus, bondholders have the right to demand immediate repayment. These bonds have a par value of 3.6 billion shekels, and it doesn’t appear that Tshuva himself could supply the capital to help the company repay. He is believed to be carrying personal debt to the banks of about 1.5 billion shekels.

Delek responded angrily to the Midroog report.

“At a time when the entire world is in the midst of a difficult economic crisis, when markets are experiencing volatility because of the spread of the coronavirus and its impact on companies in all sectors, Midroog has acted irresponsibly and unprofessionally, even though the company was informed that it was basing itself on erroneous information and that it was unreasonable and illogical to examine the company at this time, based on current market valuations that do not reflect the true value of [group] companies and certainly do not paint an accurate, complete and exact picture of the situation,” Delek said.

However, Delek’s financial situation is growing worse by the day. On Monday it revealed that it had just 110 million shekels in cash on hand and 250 million shekels in marketable securities, compared with 1 billion shekels at the start of the year. The company has taken advantage of the Israel Securities Authority’s decision to allow companies to delay their annual reports, and will only issue its figures in April.

In a report to investors on Monday, Delek detailed its bank loans mainly to foreign lenders, showing that the banks to which it may soon have to repay hundreds of millions of dollars have half of its shares in Delek Drilling and Ithaca as collateral. The company said it was in talks with lenders to deter them from acting on the collateral but that there was no certainty that the discussions would succeed.