The Markstone Capital Group has asked its investors to ante up another $95 million to keep the private equity fund afloat, otherwise the investors will be at risk of losing their previous investments.
The cash call came after Markstone’s chairman, Ron Lubash, met on Tuesday with the fund’s council of investors, which is made up of Markstone’s seven largest backers, and told them that a capital infusion was the only option left that would allow Markstone to manage the sale of its assets while maximizing the return to investors. Lubash said all the other options could, in his opinion, damage the value of its assets and prevent an orderly sell-off.
The private equity fund took out high-interest loans from a number of institutions in order to keep going. While the fund seeks to sell off its portfolio — most notably the bookstore chain Steimatzky — it is finding it difficult to command what it considers fair prices because buyers are aware of the financial pressures it faces.
Investors originally committed to putting $800 million into Markstone, but so far only $656 million has been paid in. Amir Kess, one of the cofounders and the managing director of Markstone, was killed in a bicycle accident two months ago, and Lubash has been running the fund since. Another cofounder, Elliott Broidy, pleaded guilty in 2009 to giving $1 million in bribes to New York State pension fund officials.
TheMarker has learned that Lubash has asked Moti Weiss, who is leaving the Viola Credit fund, to replace Kess and help Lubash complete the sale of assets and closure within 12 months.
Markstone’s charter states that an investor who decides not to participate in the capital call will lose its share in the fund.
Most of Markstone’s investors are American institutional investors, while the share of Israeli investors is less than 10%. Among the Israeli investors who could lose almost their entire holdings in Markstone are the insurance companies Clal, Harel, Menorah and Phoenix, as well as Poalim Capital Markets, Meitav Dash and the Amitim pension fund.
The Israeli investors have organized to oppose the capital call and have retained a lawyer to examine the issue.
But if Lubash does manage in the end to raise the money — or a large portion of it — from the disgruntled investors, Markstone will still face a very difficult path in selling off assets and paying off debt. “Not only has the fund failed to publish its 2013 financial reports, but it’s now demanding more money. The question is whether it could ever generate adequate yields on the new money that will be invested,” said an Israeli investor, who spoke on condition of anonymity.
Markstone’s holding structure is complex. Markstone Capital Group, at the top of pyramid, is on the verge of insolvency. Amfic, a subsidiary, is already insolvent. Two other firms owned by Amfic — Phenomenal, formerly Prisma Investment House, in which Markstone invested 2 billion shekels ($580 million) before it collapsed, and New Phenomenal — are also insolvent. In addition, companies that Markstone bought, such as Steimatzky and the Magnolia jewelry-store chain, are deep in debt or their shares have been put up as collateral for loans, or both. They are up for sale,
Deutsche Bank has priority among creditors for a $65 million bridge loan it provided Markstone a year and a half ago at near-black-market rates of 15% interest. Among Markstone’s most valuable holdings is Nilit, a manufacturer of nylon fibers valued at 90 million shekels on Markstone’s books. But most of the fund’s other holdings have declined in value over the years, and the proceeds of any sale of its shares are committed to Deutsche Bank to pay off the loan.
In addition, Markstone bondholders have asked the court to grant them control of Marsktone’s shares in Psagot in lieu of the 115 million shekels in unsecured debt they hold that has been in default since February. This does not include the Israeli banks, which are owed somewhere in the range of 500 million shekels.
Meanwhile, industry sources reported on Thursday that Steimatzky is again unable to meet payments to its suppliers. Steimatzky informed publishers and other suppliers that it will delay payment until June 20 of half of what was due them for May. Even Keter Publishing, whose controlling shareholder is in negotiations with Markstone to purchase Steimatzky, did not receive payment on time.
Publishers fear they will not see the money by the deadline, or even next month. Before the Shavuot holiday this week, Steimatzky began an aggressive sales campaign in advance of Hebrew Book Week, offering two books free for every title purchased. Steimatzky asked publishers to cut prices to participate in the sale, but most refused. Nevertheless, Steimatzky launched the campaign at its own expense, leaving it with almost no profit margin.
A number of publishers have stopped supplying books to Steimatzky, including Yedioth Aharonoth Books and others who asked to remain unnamed.
Steimatzky said it was splitting its June 5 payments in two because of Shavuot, Hebrew Book Week and the negotiations over the sale of the chain.
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