Russia's Woes Reverberate in Tel Aviv Capital Market

Real estate magnates Eliezer Fishman and Lev Leviev hit hard by exposure to plunging rouble.

Tomer Appelbaum

The shock waves of Russia’s financial crisis are reaching Tel Aviv, where two of the country’s biggest real estate tycoons – Eliezer Fishman and Lev Leviev -- are reeling from the plunge of the rouble’s value.

But the damage threatens to spread, with banks and institutional investors holding a considerable amount of the Fishman and Leviev debt. In addition, two major Israeli companies – Teva Pharmaceuticals and the Strauss Group – have considerable exposure to the Russian market.

Fishman’s Mirland Development, which owns and builds residential and commercial property across Russia, said on Thursday it would not be able to make a 43.9 million-shekel ($11.2 million) payment due at the end of December on its Series Alef and Bet bonds.

As a result both of Israel’s credit rating agencies, Midroog and Maalot, lowered Mirland’s rating, forcing the company to raise its interest rate. The price of Mirland’s Heh bonds, which have been under pressure for some time, tumbled another 20% in Tel Aviv Stock Exchange trading yesterday, pushing their yields to a stunning 60%.

Mirland, whose shares are traded on London’s AIM market, is controlled by three other Fishman companies – Industrial Buildings Limited, with a 40.2% stake, Jerusalem Economy with a 30.5% and Darban, which holds 15.2% of Mirland. JEC bonds were hit the hardest yesterday, with its Series Vav debt dropping 12% to leave their yield at 18% and its Yud-Gimmel bonds falling 14.25% to raise their yield to 13.7%.

JEC shares plummeted 18.9% to close at 13.09 shekels while Industrial Buildings stock fell 8.5% to 4.27. Shares of Leviev’s Africa Israel dropped 5% to close at 4.17 shekels.

Africa Israel said on Thursday that the crisis in Russia and the sharp depreciation in the rouble would likely hurt its business in Russia. The company’s AFI Development unit is likely to be hurt by weakened consumer purchasing power in Russia, a decline in the value of its assets and a rise in financing costs.

Most of the rental income from the company’s Russian property is denominated in roubles and linked to the dollar, but there has been a substantial rise in the number of commercial tenants seeking to limit the linkage, Africa said.

“Because of the great number of factors affecting Russian economic conditions and their consequences, and noting the extreme currency fluctuations, the company cannot quantify their impact,” Africa Israel said.

In the residential sector, AFI has one substantial project with 700 housing units in development, and there has not been a decline in the pace of sales so far, Africa Israel said.

“Nevertheless, the rouble’s sharp depreciation could hurt the project’s profitability,” it said. 

The drops in JEC and other Fishman companies came despite reassuring worlds from Fishman himself last week. “Developments in Russia are dramatic, but we’re not talking about a crisis that will impact on the stability of JEC and the Fishman Group,” he told bankers and institutional investors last Tuesday.

The problems of Mirland and Africa Israel threaten to reverberate through the capital market. Psagot Investment House, Menorah Insurance, and Harel Insurance & Finance are among the biggest holders of Mirland and Africa Israel securities.

Moreover, Fishman has an estimated 4.5 billion to 5 billion shekels of debt owed not only to bondholders but to banks. Between 1.7 billion and 2 billion shekels is owed separately to Bank Hapolaim and to Bank Leumi, with smaller amounts owed to Israel Discount Bank, Mizrahi Tefahot Bank and Union Banks.

Meanwhile, Strauss Group, one of Israel’s biggest food companies, faces potential problems in Russia, which accounted for 448 million shekels of sales for its 74%-owned Strauss Coffee business in the first nine months of the year. That made Russia the coffee unit’s third-biggest market after Brazil and Israel.

Strauss spent $117 million over the last five years buying Russian coffee brands and has two factories dedicated to the market, where it is one on the leading players.

Strauss, which has made no public statement about Russia, hedges in rouble exposure. That might explain why the share prices, after dropping 2.7% last Thursday, steadied yesterday to close up 0.6% at 61.71 shekels.

Teva, meanwhile, generates about $300 million of sales of generic drugs in Russia, making it one of the market's top five players. It also earned another $200 million there from the sale of branded drugs, most notably its multiple sclerosis treatment Copaxone.

Teva warned earlier this month that the strengthening dollar globally would shave some $700 million off its global sales next year and as much as $70 million of its operating profit, some of that apparently due to the impact of the rouble.

With reporting by Reuters