Analysis |

Delek Wins Reprieve From Bondholders, but Risks Lie Ahead for Controlling Shareholder

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Credit: Emil Salman

Delek Group and its controlling shareholder, Yitzhak Tshuva, have won a temporary reprieve from bondholders. Nevertheless, Tshuva remains at risk of losing control of the energy-holding group if he fails to use the extra time to raise cash and repay debt.

On Sunday, Delek Group won tentative backing from bondholders that will leave Tshuva in control of Delek for now and lifts the threat of lawsuits. A day later, Delek completed a 137 million shekel ($38.8 million) sale of shares and warrants, giving it cash it needs to assuage its bondholders.

The heavily indebted Delek Group, whose interests include stakes in Israel’s Tamar and Leviathan gas fields as well as foreign energy assets, has been hard hit by the collapse of global energy prices and a mistimed deal to buy North Sea oil fields from Chevron last year. Delek shares have plunged more than 80% since their January peak and on Tuesday ended down 11.1% at 98.83 shekels on the Tel Aviv Stock Exchange.

Tshuva, who began as a small-scale building contractor and was estimated by TheMarker last year to be Israel’s 10th wealthiest person, remains one of the last tycoons who controlled much of Israeli business a decade or more ago.

In the deal reached Sunday, bondholders led by the insurance companies Menorah and Harel, each of which hold 500 million shekels of Delek securities, agreed in principle to a plan under which Delek will accelerate debt repayments to its bank creditors. It will then transfer the collateral once held by the banks – a 40% stake in Delek’s most important subsidiary, Delek Drilling – to bondholders.

In exchange, bondholders agreed to suspend any legal action against Delek and Tshuva for the coming year. That will give Tshuva time to divest assets and raise cash to repay 900 million shekels owed to banks, thereby freeing up the collateral they have so he can transfer it to bondholders.

The Monday offering of shares and warrants was met with tepid demand and took longer to complete than planned. In the end, orders reached just 100 million shekels and they were sold at the minimum price of 100 shekels a share.

But Tshuva topped up the sum by buying another 34 million shekels of the shares and warrants. Delek sources said they expected another 65 million to be raised when the warrants are exercised, which will bring the entire capital raised to the 200 million shekels bondholders are requiring from the company by the end of May.

Nevertheless, Tshuva is not totally in the clear. Bondholders and banks still have to give their final approval for the deal. Even if bondholders, who are scheduled to hold a vote in the next several days, give their nod and Tshuva succeeds in repaying the banks, he still faces the challenge of how to repay bondholders.

Delek must meet payments of 400 million shekels to them this year and another 800 million in 2021. Given the financial woes at its Delek Drilling and Ithaca units, Tshuva can’t count on dividends from them to generate the cash he will need, so he will have no choice but to divest assets. If he succeeds, Delek will remain under his control.

However, he may never get the chance. Bondholders may yet back away from the deal reached by Menorah and Harel and opt to call in their debt immediately. If so, they will turn to the court to open an insolvency process. If the court accepts it, it would appoint a receiver for Delek Group, which in turn could pursue one of three options: sell off assets, such as Delek Drilling; sell the entire group to a new controlling shareholder with the means of injecting more capital into the group; or transfer Delek Group shares to creditors.

At the same time, bondholders would have to open up talks with the banks to prevent the latter from upsetting the process by calling in their collateral of Delek Drilling shares. If the banks refused to cooperate, they would then likely seize the 40% of Delek Drilling they have as collateral and sell the shares on the open market. In that case, bondholders would be left with the remaining 15% controlled by Delek Group as well as other assets such as Delek Israel, rights to gas royalties and real estate holdings.

Bondholders face another major risk if they decide to demand immediate repayment because bank creditors are likely to call in their collateral on Delek Drilling shares in the open market. That would put Delek Drilling in violation of a condition for one of its bank loans, namely that Delek Grup hold at least 40% of Delek Drilling. If the stake falls below 40%, the bank can immediately call in its $300 million loan.

Immediate repayment to bondholders would also have an impact on Delek Group, which sits at the apex of Tshva’s holding group. Tshuva personally owes Israeli banks some 1.5 billion shekels, against which he pledged his controlling stake in Delek Group. If bondholders act, the banks are likely to seize the collateral and either sell the group to a new controlling shareholder or break it up and sell off its assets.

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