Investors were calling it nothing short of a scandal on Sunday after Toronto real-estate developer Urbancorp filed for bankruptcy on Friday, just five months after issuing 180 million shekels ($47.8 million) of bonds for trading on the Tel Aviv Stock Exchange.
- $47.6M at risk in Israel as Urbancorp bonds plunge amid doubts by investors
- The Ticker: Canada's Urbancorp looking to Tel Aviv exchange for bond issue
- U.S. real estate firms turn to Israel bond market for funds
The brunt of the anger was directed at Alan Saskin, Urbancorp’s CEO and controlling shareholder. “I don’t think he’s a criminal, but what he did in Tel Aviv is horrible,” said one capital markets source, who asked not to be identified.
“We’re talking about someone who managed and developed many projects in Canada, a partner with major developers and until a year ago a legitimate businessman. It’s hard to know what caused the change,” the source said. “Many things apparently weren’t being managed properly, but I think Saskin got into trouble because he was overleveraged. When people are in a situation like that, they do the wrong things.”
The Israel Securities Authority suspended trading in the bonds over the weekend, after Urbancorp took the market by surprise by filing for bankruptcy restructuring in Toronto on Friday. It said it hoped a court-ordered sale of some of its assets would help it cope with its mounting financial woes and that it had started restructuring proceedings.
“We determined, after much consideration and consultation, that a court-supervised process is the best way to deal with current cash flow issues,” Saskin said in a statement. “This will allow us to reduce debt in an efficient manner, while continuing to focus on our core business.”
Urbancorp said the restructuring proposal was meant to ensure it could complete the more than 1,000 homes it has under construction in the Toronto area over the next two years.
The Canadian filing also encompassed five Urbancorp subsidiaries, with the apparent intent of bypassing bondholders in Israel. However, the Canadian company is unlikely to be able to avoid the Israeli courts because the terms of its debt requires it not to undertake insolvency proceedings anywhere but in Israel.
As a result, the trust company, Reznik Paz Nevo – which is acting as trustee for Urbancorp bondholders – petitioned Tel Aviv District Court Sunday to start proceedings in Israel. It won an order freezing the company’s assets, as well as Saskin’s.
Urbancorp’s problems had become evident in recent weeks, with directors stepping down and delays in publishing its 2015 financial reports. In the last month – after it was reported that money Saskin had injected into the company actually came with attachments – the price of its bonds collapsed and now carry a yield of 40%.
In addition, Tarion Warranty Corporation, a Canadian company that administers warranties on new homes on behalf of builders, announced last month that it was planning to revoke Urbancorp’s registration on 17 projects because of issues with the company’s customer service and concerns about the company’s financial health.
Saskin later explained that the problems were not included in its prospectus because there weren’t “relevant.”
The most important question for Israeli investors is what happened to the approximately $50 million in proceeds for Urbancorp’s bond issue. According to a recent filing by the company, it was used mainly to repay a mezzanine loan.
But Urbancorp’s prospectus stated that the debt repaid had been guaranteed by Saskin personally, meaning the money was used to rescue him from personal obligations.
The bonds sold in Tel Aviv carried a coupon rate of 8.15% – apparently the same rate of interest as the mezzanine loan, noted one capital markets source.
“If a company seeks to replace a mezzanine loan with bonds at the same cost and agrees to financial covenants that are simply impossible on an issue, it has to raise a certain amount of suspicion by everyone involved,” the source said. “If you add to that the fact that the controlling shareholders are in financial straits, that’s a problem.”
The main buyers of Urbancorp’s bonds were mutual funds operated by leading managers like Ayalon, Analyst, Excellence, Migdal, Meitav Dash and Psagot.
The Canadian developer was one of a clutch of North American companies that have issued debt bonds on the TASE in the past two years. But market sources said the Urbancorp fiasco has cast a shadow on the practice. The affair raises questions not only about Saskin’s behavior, but also about the underwriters, attorneys writing the prospectus and ratings agencies, as well as the ISA itself.
“In the long run, we can hope that the market and investors will learn how to distinguish the size and kind of companies coming to the market, in what areas they’re in business, who the owners are, what the kind of collateral is and what kind of underwriters – big or small,” said one market source.