Efforts to bring an end to the endless threats and counter-threats that have become a feature of debt-restructuring talks surrounding Elbit Imaging − Motti Zisser’s embattled real estate company − are starting to stake shape.
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Last week, the company presented a new debt settlement proposal that was put together with two of the company’s biggest creditors − the American hedge funds York Capital and DK Partners.
On Thursday, Roi Alroi, the accountant appointed by the Tel Aviv District Court to supervise a settlement, called together the consultants representing the bondholders to try and reach an understanding before going back to the court on Sunday with his opinion whether or not the joint proposal by Elbit and the two U.S. funds discriminates against other bondholders.
Together, York and DK hold more than 35% on Elbit Imaging’s bonds, with a par value of some NIS 1 billion, although they in fact snapped up the debt at about 50 agorot each. Under the proposal given to the court last week, nearly all of Elbit Imaging’s debt − some NIS 2.2 billion − would be converted to an 86% equity stake, giving bondholders led by York and DK control over the company. It also calls for the remaining NIS 300 million debt to be moved into a new bond series that would carry 8% interest and be repaid at the end of five years. Zisser would be left with 7% of the company.
Prevent a fire sale
The idea is to remold Elbit Imaging into a company without any significant leveraging and shareholders’ equity of between NIS 2.7 billion and NIS 2.8 billion. That would give it the base from which to develop and sell its property portfolio in an orderly and more profitable manner, rather than via a fire sale aimed at generating cash to pay impatient creditors.
Despite its name, Elbit Imaging, which is about 50%-owned by Zisser’s Europe Israel Ltd., is principally a property holding company with a portfolio of shopping centers and hotels in Eastern Europe, India, Israel and the United States. It also has a side business in medical electronics.
Zisser’s businesses are organized as a pyramid, which is constructed on a swamp of some NIS 3.8 billion in debt. Europe Israel alone owed NIS 1 billion to Bank Hapoalim while Elbit Imaging owes some NIS 2.5 billion to bondholders and another NIS 240 million to Bank Hapoalim and NIS 60 million to Bank Leumi. With the group so highly leveraged and the real estate markets in which it operates suffering a long-term slump, Elbit Imaging’s Tel Aviv Stock Exchange market capitalization has shrunk to a mere NIS 195 billion. Without a debt bailout, Elbit Imaging stands no chance of ever repaying its debt.
Bondholders propose Plan B
But Elbit Imaging’s other bondholders, who hold long-term debt have a plan of their own: They would swap just NIS 1.1 billion of debt into equity, which they say should entitle them to a 85% stake in the company. The remaining NIS 1.4 billion in debt would be rescheduled into long-term debt with collateral. Zisser would hold just 2.5% of equity, although he could enlarge his stake by agreeing to put more capital into the company.
The other bondholders, who are represented by the officially appointed agent representing all of Elbit Imaging’s creditors, accuse York and DK of looking for a quick exit out of Elbit Imaging.
“The official [bondholder] representatives have made several proposals that were supposed to help everyone climb down from the tree and reach an agreement acceptable to all − that on the one hand won’t discriminate between [local] bondholders and the foreign funds and, on the other, won’t enlarge the company’s debt,” said one source close to the bondholder representatives.
“They aren’t prepared to get stuck with bonds with a term of even eight years and so won’t even discuss a settlement that would award them more bonds than in the current settlement. They want the control premium in order to sell it.”
Hapoalim quietly seeking a deal?
In addition to the battling bondholders, Hapoalim has an interest in the outcome. Besides the NIS 240 million in exposure it has to Elbit Imaging, it has NIS 1 billion in loans outstanding to Europe Israel. Europe Israel offered as collateral on the loan personal guarantees from Zisser as well as a 48.4% stake in Elbit Imaging − now worth a mere NIS 95 million based on Elbit Imaging’s much reduced market valuation. That puts it on a collision course with the bondholders’ proposed debt-for-equity swap.
Until recently it appeared that Hapoalim’s top executives − CEO Zion Keinan and Shimon Gal, head of its business division − were prepared to use all means at their disposal against Zisser. More than two months ago, in response to the plan formulated by Zisser and the two American funds, they filed a petition seeking a court-appointed receiver for Elbit Imaging. Hapoalim said in the petition that it had lost all its confidence in Zisser and that it would seek to act on his personal loan guarantees, forcing him into bankruptcy.
Since then, as far as it is known, Hapoalim has held no discussions with Zisser except through lawyers. Instead, the bank has reportedly been holding behind-the-scene talks with York and DK that would encompass Europe Israel.
Further evidence that the two sides are converging is the fact that York and DK have sought to call a meeting of all bondholders to vote on removing the current group of representatives and replacing them with candidates who support the plan being put forth by Elbit Imaging and the Americans.
If their plan is, in fact, accepted Zisser will find himself against the dominant and well-paid factor in Elbit Imaging. Not only will he retain a 7% stake in the company, he will have an option to increase it to between 15% and 20%.
How the terms of this option will work has not been finalized, but it appears that it will be linked to milestones in Zisser’s increasing the company’s market capitalization relative to its debt. The first milestone is for him to reach a market cap equal to 80% of debt, which would meaning increasing it to NIS 1.76 billion. He would not have to put any money into the company to exercise the options and would be exempt from lawsuits directed at him personally.
Formally, Hapoalim hasn’t agreed to come onboard this plan and insists that it is still pursuing its own court action. But sources close to the talks say that the bank is in contact with York and DK and have sought clarifications on the latters’ plan.
The sources say that York has offered Hapoalim a 1% to 3% stake in Elbit Imaging with an option − built on the same milestones as Zisser’s − to increase it to 10% to 15%. Zisser’s share would be guaranteed to the bank, with any dividends paid on them going to serving the Europe Israel debt.
However, right now it would be very difficult to price this offer. Despite estimates by the financial consultant Amir Barnea that Elbit Imaging should be able to trade at 0.8 times its shareholders’ equity after the arrangement goes into effect, the current economic situation makes that unlikely to happen anytime soon.
In addition, much of that shareholders’ equity is based on undeveloped land in problematic areas, such as Eastern Europe and India. Elbit Imaging’s medical business is difficult to value. Thus it is likely that the company will trade at a market cap of less than NIS 2 billion, which would leave its stock worth between NIS 200 million and NIS 300 million.
The two American funds are also due to see short-term losses if Elbit Imaging is trading at these low valuations. But in the future they stand to win in terms big enough to compensate them. For Hapoalim, which has already made a provision for the Europe Israel debt, the plan would enable the bank to record any repayment they get as recovered debt amounting to hundreds of millions of shekels and, accordingly, entitling their managers to bonuses.
All told, the plan looks attractive to Hapoalim, even if it means writing off NIS 500 million or more of debt.
The problem for Hapoalim is that the Leumi-Ganden write-off, which generated floods of negative publicity for the bank, makes it difficult for lenders to consider only the financial aspects of the bailouts they agree to. Thus Hapoalim’s managers are undecided about how to act, fearing they will be seen as surrendering the interest of the depositors and shareholders in order to rescue a tycoon even if such an arrangement is the best of all possible alternatives.
Hapoalim is in all likelihood looking for a way to structure this in a reasonable way to its board and to the public. Even if it succeeds, there is no guarantee that the plan will win the backing of the 75% of bondholders required for approval. In that respect, getting the backing of Alroi next week would go a long way to helping them.
With reporting by Shelly Appelberg.