IDB's Debt Woes Are Much Less a Tangle Than It Seems

Why not let the bondholders trade the debt for equity and let the banks remain as creditors?

Nochi Dankner on Sunday won a reprieve on handing over control of his IDB Development Corporation to its creditors. Judge Eitan Orenstin of the Tel Aviv District Court effectively gave him two months to get IDB's finances in order by selling Clal Insurance, thereby giving him some breathing space.

IDB Development's debt problems appear at first glance to be unusually complicated and have defied all efforts at solving it. But in fact, it isn't nearly as complicated as it seems and the solution is now within shouting distance.

The most significant of all the bailout plans for IDB proposed to date comes from the bondholders themselves, led by York Capital, the American hedge fund, together with Psagot Investment House and Phoenix. In simple terms, it proposes to merge IDB Development into its parent company, IDB Holding Corporation, reduce their combined debt from NIS 8 billion to NIS 4 billion and turn the merged company over to their creditors. That includes not only the bondholders, but the banks as well.

This plan would leave IDB much healthier financially than it is today. Its net asset value would be significantly higher than it is right now because of the reduced debt. The shadow of insolvency would be removed from it and it would have no need to sell off assets, such as Clal Insurance, to raise cash.

The main parties opposing this plan are IDB Development's bank creditors. Ignoring for a moment the deep conflicts of interest they have, the reasons they put forward for rejecting the debt-for-equity swap can be summed as follows:

"We have no interest in IDB Development shares or in its assets," their thinking goes. "We are here to provide credit, not to manage companies. We are well aware of the company's difficult financial condition and its liquidity crunch. Its bonds trade at junk yields of 12% to 34%. As banks, we are ready to go the bondholders' way and to reschedule the debt, restructuring it slightly differently and extending it to give the company time to reorganize. But, we firmly believe, that there is no reason to hand over the company to its creditors. Nothing good can come of this."

On top of these two proposals, there is a third one that was proposed over the weekend by Danker and Eduardo Elsztain, the Argentinean real estate tycoon who is offering to inject capital into IDB. The two say they have the cash that will remove the threat of insolvency from IDB Development. How much cash? NIS 400 million. Where will it come from? Outside investors. Who are these investors? Don't ask. When will the money arrive? By the end of December, if it comes at all. Does this proposal solve IDB Development's problems? Apparently not. We're talking about an amount that would hardly put a dent in the NIS 6 billion IDB Development itself owes.

Given that their proposal was only released to the public 12 hours before Sunday's hearing before Orenstin, it is hard to know how much meat there is to their proposal.

Elsztain had an option to invest another $75 million in Dankner's privately controlled investment vehicle, Ganden Holdings, anytime until the end of February. But he didn't act on it. He hasn't explained his reasons. At the press conference he held last week, Elsztain failed to convince many people about the seriousness of his intentions. He said he would put up the money. He said that he would bring in other investors.

So he said, but Bank Leumi, among others, doesn't think the cash will ever arrive.

So what can be done? Orenstin sent the bondholders and IDB management home for two months to try and patch up their differences. In the meantime, he authorized IDB Development to make an NIS 800 million payment due bondholders in June and July, to be placed in an escrow account. The money will wait there until the children stop fighting. That's all very nice.

Since everyone seems to have their own bailout plan for IDB Development, let me propose one of my own. I outlined this to several people – all of them economists, business people, lawyers and journalists – after Orinstein made his ruling on Sunday.

Some of them said it has a certain logic to it. It has elements that would satisfy the demands of the bondholders, the bank creditors as well as those of a certain judge who doesn't want to set any dramatic legal precedents with the case.

My plan won't bring much joy to Dankner himself because he would have to part ways with IDB Development, but that's the price he would have to pay. So long as he doesn't bring any new money to the table and IDB Development is being financed by its creditors, he has nothing to complain about.

So, here is my plan for your kind consideration:

The banks don't want to get shares in IDB Development? No problem. They won't get any. They can continue holding the NIS 2 billion of debt they have with the company and leave the stage for the bondholders. The latter – both those who hold bonds with IDB Development and IDB Holding – will get all the equity in the two companies, as well as its NIS 165 million in cash.

They can divide the shares up as they see fit. They can divvy it them up according to the agreement they already reached among themselves, whereby 90% of the stock does to IDB Development bondholders and the rest to IDB Holding bondholders, with an option to adjust the ratio to 75-25.

The debt-for-equity swap will leave the two companies with combined debt of just NIS 4 billion. The merged company will have NIS 4 billion in debt left over, divided equally between what is owed to bondholders and to the banks. The less-leveraged company will be financially stronger and well able to meet its repayment schedule. The banks' situation will be greatly improved, so they will have little reasons to oppose it.

The bondholders, meanwhile, will get what they wanted. They will be able to replace the top management, with whom they had little confidence to begin with. The company will not have to conduct a fire sale of its assets because it has no time pressures to raise cash. It can wait patiently and improve the value of its holdings.

As Danker will now be sitting on the outside the IDB group, the banks that have lent money to his two privately controlled companies – Tomahawk and Ganden – will have no assets to collect. They will have no choice but to call him in on the personal guarantees he and the other shareholders gave.

Right now, my proposal looks the most obvious and desirable. The only question that remains to be asked is, who will take up the gauntlet and turn the idea on paper into a real bailout?
 

Daniel Bar-On