IDB Asks Court to Reject Bondholders' Debt-for-equity Plan

Petition claims efforts to acquire assets worth billions more than the amount owed constitute 'a hostile takeover.'

IDB Development Corporation, Nochi Dankner's embattled holding company, asked the Tel Aviv District Court on Sunday to reject a proposal by bondholders to take control of the company through a debt-for-equity swap, terming the plan a "hostile takeover."

"IDB Development has assets in excess of its liabilities amounting to NIS 1 billion," the company told the court. "The claim that we are insolvent has been and remains false, and its aim is to undermine the stability of the IDB group and take control of its assets," the company said.

The petition came two days after a group of institutional investors holding bonds in IDB Development agreed with those holding bonds in its parent company, IDB Holding, on terms for exchanging some NIS 8 billion in debt into shares and longer-term debt. If the plan wins approval from other creditors and the courts, Dankner would lose control of the group, whose assets include some of Israel's best-known companies.

IDB accused the bondholders – led by York Capital of the United States, and Israel's Psagot Investment House and Phoenix Insurance – of trying to take hold of assets worth billions of shekels more than the debt they now hold.

IDB cited an offer it received on Friday from an unnamed overseas investment fund to take a 27.5% stake in IDB's Clal Insurance unit, and an option to buy the remaining shares at a company valuation of NIS 4.5 billion.

On its books, however, IDB Development had negative equity of NIS 239 million at the end of 2012, the last period for which it published financial results. It has NIS 1.1 billion in cash, enough for it to meet its obligations until the end of 2013.

IDB Development alone owes NIS 4 billion to bondholders and NIS 1.9 billion to banks and other financial institutions, while IDB Holding owes another NIS 2 billion. Without additional outside investment or the sale of assets like Clal Insurance, the company will not be able to fund its repayments out of cash flow.

Prices of IDB group shares and bonds rose for the most part in Tel Aviv Stock Exchange trading Sunday, but Ayalon Group said that didn't necessarily reflect positive sentiment toward the agreement proposed by bondholders, which even if approved will still entail big losses for many bondholders.

IDB Holding Series Dalet bonds jumped 14.75%, while its Series Heh bonds advanced 9.2% and Series Gimmel by 6.7%. But IDB Development Series Chet bonds were down 6.85% and IDB Holding stock fell 4.7%.

"Today's rises come against the background of greater clarity about the potential of IDB creditors getting some of their money back, not on any financial assessment that this is a satisfactory agreement," Ayalon said.

In the petition to the court, IDB also attacked the legal basis of the bondholders' plan, calling it "erroneous, illegal and impossible," and noting that IDB's creditors would gain control of the company without anyone knowing the true value of the assets they had taken over.

"Even if, for example, the company became insolvent, there would still be no requirement they wind up and divest its assets, nor would it be possible for these or any other creditors to take over the company's assets without them being auctioned under the auspice of the court to maximize the value obtained [by their sale]," IDB said.

The company also warned the court that the bondholders were causing damage to the company – damage that would affect the entire Israeli capital market if the court accepted their debt-for-equity proposal.

"In a challenging period, when it needs to focus all its efforts on intelligently managing repayment of debt on the basis of its assets, the company finds itself enmeshed in a foggy legal process whose aim is to give the impression that the company is insolvent," IDB said.

Zehava Dankner – Danker's mother and a former IDB Holding board member – weighed in on Sunday, saying bondholders would be better off cooperating with her son than trying to wrest control of the business from him.

"There's a lot of envy and jealousy against a man who has contributed so much. Nochi is not a man who flees, because his roots are here. His grandfather and grandmother were Biluists who immigrated in the 19th century," she told Army Radio, referring to the earliest Zionist settlers.

"He has the strength and the ability. ... They need to give him the chance to succeed. They need to have faith in him," she said. 

Ofer Vaknin