All That Glitters / Yes, Dankner Is Cutting Your Hair

Delaying repayment without compensation and putting in no money of his own. Doesn't sound like an offer investors can't resist.

Two guys are hanging out and one asks the other if he wants to join an orgy.
"How do we have an orgy? asks the first. "You bring your wife and I'll bring a supermodel," his friend explains. The first one asks, "And what if the supermodel doesn't show up?"  "Well, I guess that just leaves the three of us," the second guy says.

That joke, says a finance expert, beautifully tells the tale of Nochi Dankner's debt restructuring proposal made to IDB Holding Corporation investors on Monday.

"Since the controlling shareholder isn't bringing anything to the table, or next to nothing, there's no good reason to restructure the debt," the expert said. "The institutional investors and bondholders need to wrest control of the company."

But Dankner and his people aren't giving up. IDB Holding Corp, the firm at the top of Dankner's business pyramid, may be in its last throes, but he has no intention of putting a single shekel of his own money into the company. Yet he and his cronies think they can keep their control over it and over the entire IDB group.

On Sunday TheMarker reported an insider transaction in the making. It was for IDB Development Corporation – right under IDB Holding in the pyramid – to sell Clal Insurance Enterprises Holdings to group company Koor Industries, which is several levels lower down in the IDB family of companies.

There is no business logic behind such a sale. All it would do is funnel Koor's cash to the top of the corporate pyramid, allowing IDB to pay off part of its debts.

This type of insider deal would likely harm the interests of Koor's investors. Subsequently, the Movement for Quality Government filed a request for information with Israel Securities Authority chairman Shmuel Hauser and the Finance Ministry's commissioner of capital market, insurance and savings, Oded Sarig.

Within less than 24 hours, the capital markets were informed on Monday of a new idea. Dankner proposed to restructure IDB Holding's current debts over 15 years. As presented to institutional investors Excellence Nessuah, Harel-Pia Mutual Funds, Gilad Pensions for Religious Workers and bondholders' representatives, IDB would issue three separate bond series with increasing interest rates.

IDB sought to emphasize in a statement on Monday that this isn’t a haircut, that market argot for partial default. "The bondholders will see the same amount [of money] they are owed today with interest. It's just spread out differently.

A source close to IDB went even further. "Relative to the other tycoons who implemented haircuts, there is no haircut here," the source said. "The injection [of funds] in the proposal is larger in relative terms than what we have seen in other debt restructuring arrangements."

Not true. To be clear: Spreading out IDB debt repayment over 15 years is a haircut, and a significant one at that.

There is nothing wrong with a company replacing one loan with another one with a longer repayment period – if it compensates lenders with a higher interest rate to compensate them for the longer time repayment will take.

To determine whether the delay in repayment is a haircut - one must compare the different loan cash flows based on the company's cost of capital.

That applies to steady companies. But the method falls flat when dealing with a company in crisis.

IDB's bonds are trading at yields above 50 percent, reflecting a profound lack of faith in the company's ability to survive. Calculations based on the company's cost of capital are meaningless.

Is IDB safe?

So how can we evaluate Dankner's new offer?

When a company is in danger of going bust, the only way to evaluate it is based on the Merton Model. Named after Nobel Prize laureate and economist Prof. Robert Martin, the model evaluates a company's credit risk.

The Merton Model views shares as options on a company's assets.

A "put option" is an option to sell shares. We can calculate the value of the put option to derive a company's credit risk.

Or, more simply: This method gives us probabilities for possible outcomes of Dankner's new offer. For example, there is a 50 percent chance Dankner will return all the money he borrowed, a 70 percent chance he will return half the money he borrowed, and so on.

One thing is for sure, there is real chance that he won't return some money; and there is a chance he will return none. Ergo, his proposal clearly presents a haircut.

Secondly, beyond the haircut, the proposal to extend the debt repayment period also constitutes an infringement of bondholders' rights.

Other tycoons put hundreds of millions of dollars of their own money into their companies while extending debt repayments: Lev Leviev at Africa Israel Investments, the Ofer family at Zim Integrated Shipping Services and Yitzhak Tshuva at Delek Real Estate. But Dankner is asking the public to hold off collecting for 15 years without putting any skin in the game.

All his people can say is that there is some guy in Argentina who may or may not sink NIS 180 million into IDB Holding, while the company's debt to the public reaches NIS 1.7 billion.

Now that the proposal has been made, the ball is in the hands of institutional investors.

Things at the moment don't look so rosy for Dankner. A sources close to the bondholder representatives said, "The current proposal doesn't provide a basis for negotiations. We will take a look at all the options open to us."

The capital market hasn't taken to the new proposal either. IDB Holding's B4 bonds fell Monday by more than two percent and their yield increased to 57 percent, while IDB's shares dropped 2.6 percent.

Based on these facts and analysis, Dankner's proposal seems unlikely to pass. Yet such things have happened before. The past two years have been replete with examples of debt restructurings that began with pitiful proposals that led to negotiations and eventually debt restructuring agreements with double digit haircuts for investors.

Emil Salman
David Bachar