Israel's Delek Group Headed for a Debt Deal Amid Signs It Can’t Meet Payments

‘Delek will find it difficult to meet all its obligations without rescheduling payments or a haircut,’ IBI analyst says

Eran Azran
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Businessman and CEO of the Delek Group Yitzhak Tshuva (right) and the chair of Singapore's stock exchage at a conference in Tel Aviv, 2017.
Businessman and CEO of the Delek Group Yitzhak Tshuva (right) and the chair of Singapore's stock exchage at a conference in Tel Aviv, 2017.Credit: Meged Gozani
Eran Azran

Delek Group, the giant energy holding firm controlled by Israeli businessman Yitzhak Tshuva, may have no choice but to seek a debt accord, it emerged from the company’s fourth-quarter financial report, issued Sunday.

“Under current conditions, Delek will find it difficult to meet all its obligations without rescheduling payments or a haircut. Time is a critical component of the equation,” Liran Lublin, head of research at IBI Investment House, said in a note that was published Monday.

Delek, whose interests include the Israeli natural gas fields Leviathan and Tamar as well as North Sea oil assets controlled by its Ithaca Energy subsidiary, is weighed down by 7.8 billion shekels ($2.2 billion) it owes to bondholders and banks.

On Sunday, CEO Idan Wallace said Delek “is a strong company with quality assets and a clear positive net asset value.”

But Delek’s auditors, the accounting firm Ernst & Young, attached a “growing concern” warning to the company’s financial report, meaning they have doubts about its ability to survive and meet its obligations.

Delek shares, which have seen their value tumble 74% since the start of the year, fell by another 10% on Monday to close at 136.80 shekels on the Tel Aviv Stock Exchange. Its bonds, which now yield between 40% and 280%, fell by as much as 9%.

When Ithaca agreed to buy North Sea assets from the U.S. oil giant Chevron in a leveraged deal a year ago, then-CEO Asi Bartfeld said he was looking at “growth opportunities” in energy exploration and production. But the coronavirus pandemic has caused energy prices to crash to their lowest in years, and prospects for recovery look poor.

Delek Group wrote off $200 million from the value of its Ithaca holdings last year to $1.5 billion and is expected to write off another $600 million in its first-quarter report – a total of $800 million, or about half of what it paid Chevron for the North Sea assets.

Meanwhile, Delek must repay principal and interest on its debt totaling 2.1 billion shekels by the end of 2020 and another 1.7 billion by the end of 2021. The company had just 400 million shekels in cash on hand at the end of April.

To help it make the payments it plans, among other things, to raise some 1.5 billion shekels by selling royalty rights due it from Karish and Tanin gas fields it sold to the Greek energy company Energean, royalty rights from its share in the Leviathan field, its Delek Israel unit and real estate. Delek is also counting on dividends from its Delek Drilling and Ithaca units totaling 1 billion shekels by the end of 2021.

Even if the company succeeds in collecting the dividends and completing the asset sales, by the end of 2021 it will have just 189 million shekels in cash, according to its own forecasts.

Lublin of IBI Investment House, however, expressed concern that Delek would not be able to raise all the cash it plans. He warned in his note on Monday that Delek’s bank creditors are getting anxious and may try to call in their loans early.

“The information provided by Delek in its [fourth-quarter] report indicates that it in breach [of agreements] vis-a-vis all of its creditors (five). Some of them have not yet taken steps, and one, Bank Leumi, has threatened to seize collateral – a plan that has been blocked by a temporary court order,” he noted.

The Tel Aviv District Court, which issued the injunction in connection with 100 million shekels Delek owes Leumi, will holding a hearing Tuesday morning on the issue. The bank wants to seize a 5.7% stake in Delek Drilling, worth 300 million shekels. The bank claims that Delek had violated an agreement to provide by April 30 to pledge an 11% stake in another unit, Delek Israel, against debt.

“The fear that [creditors] will act on pledges is real. The court injunction was issued before [Delek’s] annual report was published, and the risk for Delek is that the court will now reconsider whether to extend the order in the face of the ‘going concern’ warning. The seizure of shares by one lender could have a domino effect, with other leading banks seeking to do the same,” Lublin said.

Vis-a-vis bondholders, Delek also faces a growing threat. Under the covenants that it signed with them, it cannot allow its shareholders’ equity to fall below 2.5 billion shekels for two consecutive quarters. The figure was 4.1 billion shekels at the end of 2019, but the Ithaca write-down is expected to reduce that to just 2 billion.

Delek has promised bondholders it will raise 400 million shekels in capital but Lublin said it would not be enough. “We believe that buying more time is an important step in the consolidated debt settlement, but alone will not provide a solution,” he warned.

In addition, Lublin noted, bondholders demanded other concessions that Delek hasn’t responded to, so the threat remains that they will demand immediate repayment.

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