After 10 days of secret talks, which amazingly didn't leak to the press, and another all-nighter that ended Friday morning, a thing happened in Israel's business world.
- IDB Asks Court to Reject Bondholders' Debt-for-equity Plan
- IDB in Turmoil: What Next?
- IDB Bondholders Taking Control, Dankner May Lose Job
- The Richest Israelis Got NIS 10 Billion Richer in 2013
- Israel's Banking Caste, Robbing You Blind
For the first time, bondholders with conflicting interests reached accord, to seize control over the conglomerate from its owner, who was defaulting on its liabilities.
In a proper market economy, if a company's owners don't pay up, control goes to the creditors. This hadn't happened before in Israel, though. In most cases, pressure gets applied, but the owner manages to drive wedges between the various interest groups. In the end, the indebted owner throws them a bone and keeps control.
Thus, for the first time in Israeli history, diverse investment institutions plus a foreign hedge fund did what needed to be done. They decided to take over the company without negotiating. They aim to split up its assets, reorganize the equity structure and set the firm on a new path.
Two people deserve congratulations for this revolutionary settlement: Hagai Badash, CEO of Psagot Investment House, and Eyal Gabbai, representing the court.
Badash, representing the bondholders of IDB Development Corp, unveiled the plan and did not hesitate to take on Dankner, the economy's strongman.
Gabbai applied negotiating skills he honed when he headed the Prime Minister's Office and managed the Government Companies Authority, where he carried out privatizations. He presented alternatives, brokered, mediated and got the sides to agree.
Gabbai may be a talented negotiator but it was Badash who showed courage, along with Uzi Danino, CEO of Excellence Investments Group, Yoav Armoni, CEO of Gilad Pension Fund, and Eyal Lapidot, CEO of Phoenix Holdings. This was the first time the hired guns of the investment banks and insurance companies did the right thing for their clients and the saving public overall. They went up against the club of tycoons and their cohorts – which includes investment houses, banks and advisers.
This is a club whose sole purpose is maintaining control over the public's savings – savings invested in publicly-traded companies via banks and investment houses. Until today no such hired guns could be found: Their predecessors knew that such a move would ruin their careers.
Come the rabbits from the hats
But it's far from a done deal: The controlling owners of the IDB group, Nochi Dankner and his partners, have sworn to fight to the end. In court they'll claim that the company isn't bankrupt at all. They'll pull new rabbits out of their hats, for instance a big asset selloff, and will argue that the money will let them meet their debts for the next year. They'll seek the banks' help.
The banks could be a major player in the legal saga because the money they lent IDB makes them party to any agreement. But the banks are swamped in conflicts of interest.
Bank Hapoalim, for instance, gave huge loans to both IDB Development and Tomahawk Investments, the Dankner family's private company. Now, back when, the bank was run by Dankner's cousin Danny Dankner, and it was Danny Dankner who got Hapoalim CEO Zion Kenan appointed.
How will Kenan react? On the one hand, a reorganization of IDB Development's debt would benefit the bank, but Tomahawk would be left without assets and the bank would need to exercise its guarantees.
Bank Leumi, Israel Discount Bank and Bank Mizrahi-Tefahot also made loans to both IDB Development and Dankner's private companies. A debt restructuring at IDB Development would kill their chances of collecting their debts from these firms.
Which way will the banks choose? As of now, Hapoalim et al are simply saying that nothing was coordinated with them and they haven't agreed to anything.
But as in the case of Bank Leumi CEO Rakefet Russak-Aminoach and the Ganden Holdings write-off, Kenan faces a tough decision. He needs to determine, with the bank's money, the fate of someone he's close to and who helped get him his job.
It will be fascinating to see if the bank chiefs choose to help out a member of the club, again, or make the financially warranted move.
Dankner will go but the system will remain
Since the financiers can't necessarily be counted on to stay in Dankner's corner, the court must take the lead. Although it will field all kinds of legal arguments, promises, requests for postponements, appraisals and analyses, the court should the bondholders' agreement reached Friday.
It all boils down to one issue: IDB Holding can't meet its liabilities, IDB Development can't meet its liabilities, and the current managers have failed.
Control must be transferred to the creditors, and management to a new team chosen by the new owners.
Yes, finally Israel will have an American company (in addition to Teva Pharmaceutical Industries, where most shares aren't in Israeli hands) with stock distributed among investors and the public without anyone holding the reins via a minimal "controlling interest."
This stake is often acquired through credit and gives the owner all the power and profits accruing with success, while the losses whack the public when things go wrong.
The court must also understand that this settlement is the right thing for the company. The agreed-on write-off of part of the debt would reduce the group's leverage and let it operate efficiently. And the court must understand that the settlement is good for the capital market and economy as a whole. The precedent would make clear that a mechanism of reward and punishment exists in Israel, too.
There is no doubt that, as soon as this occurs, managers and controlling owners will be very careful about taking on loans and excessive risks. They will become true representatives of the shareholders.
Court authorization for transferring control obviously won't heal the capital market overnight. Dankner might go home but the system and the culture will remain. There's a whole herd of people who know how to pad their pockets via connections, club memberships and convenient arrangements – with the public picking up the tab.
These are CEOs, consultants, publicists, media people, economists, appraisers, politicians, regulators – the list goes on. After Dankner, they'll be looking for the next tycoon, the next person controlling large budgets – private or public. But the settlement reached on Friday is a giant first step.