The nature of brilliant moves is that the moment they take place, everyone starts to wonder why they didn't occur earlier. Once such move is York Capital Management's acquisition of IDB Development bonds, as revealed in TheMarker last week. The American hedge fund group bought up 20% of the company's total bond debt, with a face value of NIS 800 million - a game-changer for Israel's largest holding company, which is currently controlled by Nochi Dankner.
Every investment manager with whom we spoke said this move was asking to be made, and that York's investment would most likely turn out to be a good one. "There was an opportunity here. There are lots of good companies that could be bought through that investment at half-price. York has a plan for finding value in that investment," said one market animal.
The market responded almost instantly. After months of losses, the prices of IDB's bonds shot up, meaning that investors suddenly believed there was an opportunity in this debt. For those who aren't well-versed in the capital market, here, in simpler terms, is what happened: IDB Development, which controls a long list of major companies that sell us products or services on a daily basis - including supermarket chain Super-Sol and cellular operator Cellcom - issued billions of shekels in bonds, which are basically loans to the company. The bonds are traded on the stock exchange, which means that anyone can buy a bond and thus lend money to IDB. But IDB has been in dire financial straits for the past few months, and investors don't believe the company will make good on its debts - meaning if you bought one of the company's bonds, it may not give you back some or all of your money. This has driven the price of the company's bonds to an all-time low. At these prices, they could be worth buying even if the company pays back only two-thirds of its debt.
"They did professional work and determined that at the current prices, IDB's bonds are an opportunity," said another market watcher. "If IDB behaves right, it will be able to pay back its debt and York, which bought the debt on the cheap, will profit big time. If not, York could take over companies IDB controls. This investment was asking to be made. York specializes in rehabilitating companies in distress; this is a field that demands great knowledge and professionalism. And here's IDB Development, which even in its current state can still service 70% to 80% of its debt. Even better - if it recovers, York can profit doubly."
The amazing part about this investment was the silence surrounding it. Until Tuesday of last week, when the fund's director for Israel, Jeremy Blank, informed the institutional investors and the bonds' trustees, no one in the capital market knew what was in the works. In Israel, where everyone talks ceaselessly with everyone else, buying up such a large quantity of assets without causing an echo is astounding. Furthermore, the quiet was a professional necessity, and it saved York a significant sum. The big risk in buying up such a significant quantity of bonds is that the demand created by a behemoth like York could increase demand and push up prices, and thus the investor could be shooting himself in the foot - he could find himself unable to buy the quantity of bonds he wants at the current market price.
York's success can be seen in the fact that the bonds' price dropped throughout most of the period when York was buying. "It's an amazing move - to buy that kind of volume and to have the price drop throughout. Someone did excellent work," said a source at an institutional investor.
York determined several quarters ago that IDB Development was a better investment than IDB Holdings, and started analyzing the company's structure. It thoroughly examined the companies in IDB Development's portfolio. It determined their potential for betterment, the company's financial structure and points of inefficiency, the value of the group's control premium and its corporate governance issues.
The analysis was led by Blank, with the assistance of a small team in Israel as well as analysts in the company's New York offices. Ultimately, the company concluded that the investment would be worthwhile. Then, York set out on a six-month shopping spree, slowly buying up bonds through foreign brokers to keep the move secret. "York's team knows to work in Israel with a limited number of professional institutional investors and to buy from people who don't talk - and via a foreign broker, they know how to compensate those who give them the goods. Anyone who works with them in Israel understands their need for secrecy," said a market source.
Good for the company, less so for Dankner
No one was more surprised than IDB itself, which woke up one morning to find itself in a completely different game, facing an aggressive bondholder that could likely take an active part in the company's management if it defaulted. That Tuesday, as he informed the other bondholders of York's investment, Blank also contacted IDB itself. It took the company until Wednesday to respond, at which point the sides launched a dialogue.
York's move isn't necessarily a bad one for IDB Development. After all, this is a lender that wants to see the company rejuvenated, which would push up the price of the company's bonds. Even if IDB were to default, York would still want to see the company recover.
Yet this is not necessarily good news for Dankner, the owner. Dankner doesn't control IDB Development directly; rather, he controls Ganden Investments, which controls IDB Holdings, which in turn controls IDB Development. Ganden isn't in great shape - it owes money to the banks, which have given up hope that they'll ever see it. IDB Development is in the worst shape of them all, and it's currently not clear how the company will pay back its debts.
IDB Development is the strong point in Dankner's corporate pyramid, and it's closest to those subsidiaries that are still functioning. Thus, Dankner's ability to maintain control of his pyramid rests on IDB Development's assets. Via Ganden and IDB Holdings, Dankner is a shareholder in IDB Development. Thus, due to the nature of corporate finance, Dankner takes second fiddle to the bondholders until it's 100% certain that the company can pay back its debts.
York's debut as an IDB Development bondholder puts the company's shareholders on the defensive, and guarantees that any profits will go first and foremost to pay back bondholders, instead of being passed up the pyramid to IDB Holdings, Ganden and Dankner himself. "Shareholders in IDB Holdings have nothing," said a source at an institutional investor. "They can't pull any money out of IDB Development. IDB Holdings has no money. IDB Holdings' bondholders should become shareholders [which sometimes happens when a company defaults on its debt - bondholders seize stock instead]. York knows how to manage such a situation, and its actions will serve bondholders' interests. York has two things that Dankner lacks - lots of time, and lots of money."
If IDB were to have a say in who owns its bonds, it probably wouldn't have chosen York. York is known in Israel mostly for having owned the country's largest investment house, Psagot, between 2006 and 2010. During those years, Psagot established itself as unbiased, free of conflicts of interest within the local capital market and unafraid to stand up to the country's tycoons in matters such as debt settlements and interested party transactions.
Psagot even opposed IDB's problematic purchase of Dankner's private airline, the loss generator Ganden Tourism. Psagot had York's full backing throughout all this, which gives an indication of what we can expect should IDB Holdings head toward a debt settlement.
In Israel, a one-man show
Don't be fooled: York is no Mother Teresa looking out for our pensions. It's a shark with $16 billion in managed assets, half of that sum in distressed companies such as IDB.
The group was founded in 1991 by James Dinan, reported by Forbes to have a personal worth of $1.4 billion. Since then, it has achieved annual returns of 15%. It has offices in Washington, London, Singapore, Hong Kong and Moscow. Minimum investments are $5 million for private individuals, and $25 million for institutionals. The company has holdings in major banks including J.P. Morgan Chase and in major U.S. car manufacturers, including General Motors.
One surprising investor in York, who turns out to be relevant to the current affair, is the bank Credit Suisse, in which IDB itself is invested. York is a closed institution that shies from the media. Behind Dinan is chief investment manager Dan Schwartz, a billionaire himself. Schwartz is an introvert who visited Israel quietly several times over the past few years.
In Israel, York is managed as a one-man show. Blank, a young investment manager in his 30s who recently immigrated to Israel and is learning Hebrew, heads a small, part-time team and manages the fund's operations in Israel nearly alone. "Jeremy is the type who can look at a complicated excel file and give you a financial insight within a minute," said a source who knows him. "He's a genius in his field, great at analysis, quick to understand, who doesn't get wrapped up in extraneous considerations."
York has given Blank its full trust and near total freedom of action. "This is a professional, to-the-point fund that works to make its customers money," said another person who knows Blank. "This is a small team of strong, intelligent people, not philosophers like at the other funds, where it takes six months just to start looking into an investment. The fewer people there are involved in a process, the quicker things advance."
After selling Psagot, Blank had been relatively inactive in Israel. Over the past year and a half, he took a role in the fund's European acquisitions, including its purchase of Royal Bank of Scotland debt and other assets in Germany. The IDB investment brings Blank back to his field of expertise, bonds; he began his career as a bond trader.
York's investment also holds broader meaning for Israel's capital market. In place of the brawling we've become accustomed to between controlling shareholders and institutional investors, we're now probably going to see how things are handled by a professional, unsentimental body whose only goal is to make money.
If an incident like this had happened in the United States, it would raise far fewer eyebrows. In a developed Western market, a financial institution's investment in IDB would have been merely a matter of time. But in Israel, the public's money managers wouldn't consider a massive investment despite the opportunity, due to their fears of a head-on collision with the holding company.
In a balanced market, funds like York are supposed to be the ones protecting the public's money by achieving optimal terms for all bondholders. "In larger and more developed markets, when a company like IDB runs into trouble and private investment funds buy 20% to 30% of its debt and tell the owner, 'Hi, I'm your lender. Either convert my bonds into stock or we'll find another way to do this,' it's a standard move. In Israel, it's new. York isn't here to lose money. It's not afraid to be aggressive if it needs to. "They're to-the-point, they won't buy up newspapers or airlines [a reference to bad investments by the IDB group]. The moment they're holding bonds, IDB is sure to pay back its debts. No one will suddenly pull out a dividend [from IDB] that will leave the bondholders worse off. This move will bring Israel the norms of an aggressive U.S. hedge fund with a tendency for hostile takeovers. These are threats that haven't existed here until now. IDB knows now that if it doesn't offer a proper plan, it will be exposed to American bombs."
Officially, IDB and Dankner are still declaring that it's business as usual. IDB Development intends to pay back its debt as scheduled, the company has said. If that's the case, then York is just another bondholder that bought a financial asset that could potentially turn it a profit. In practice, though, IDB stands a very small chance of meeting all its obligations, and over the next few months we're likely to have confrontations of a type never before seen in Israel's capital market.
A year and a half after York carried out a perfect exit at Psagot, raking in top money thanks in part to the soaring Israeli capital market, the fund is trying to catch the market at what may be an absolute nadir and ride it to profits.