You, Piggybank to Israel's Tycoons

How IDB Development saved from going-concern warning at your expense.

A going-concern warning is a red light that a company’s auditors are supposed to turn on for the investing public.

It’s a kind of flashing signal that tells investors the company whose financial report they are reading is in trouble. The trouble might not materialize on the morrow, it says, but the company will have difficulty meeting its obligations over the next 12 months unless something material changes for it.

In plain English, the going-concern warning means the company is headed for bankruptcy, even if it isn't quite there yet. Clear-sighted investors who do not believe in miracles will steer clear from a company in that situation.

About two weeks ago the Israel Securities Authority, which knows how important this warning sign is, issued a new directive about going-concern warnings. The directive emphasizes that when a company considers its ability to meet its obligations, it must look at the long term.

The ISA also demands that companies leave optimistic scenarios of selling assets above their fair value out of their cash-flow forecasts.

IDB Holding Corporation released its financial report for 2012 just before Passover. This company, which is at the top of Nochi Dankner's IDB pyramid, has been operating under a going-concern warning for about a year. Yet its fully-owned subsidiary, IDB Development Corp, managed to avoid such a warning. How? By reaching an agreement with six banks and one insurance company to which the company owes NIS 1.8 billion.

Thus this group of creditors agreed to go easy on IDB Development.

IDB Development’s auditors, KMPG Somekh-Chaikin, settled for stating in a note to the financial report: “As for the company’s financial situation, the company’s plan to divest assets, together with constraints including financial covenants imposed upon it by agreements with creditors about selling certain holdings, limit its ability to raise and repay new credit, to create encumbrances or to make investments.”

But somebody's going to pay the bill some day, and that somebody is IDB Development’s bondholders. The company owes them some NIS 4.2 billion.
Most of IDB Development's debt to banks is short-term. Because of that, there is no doubt that the banks’ interest is substantially different from that of the holders of the long-term bonds.

The more time passes and the company continues repaying its ongoing debts fully, the less the holders of its long-term bonds can expect to receive.

In addition, according to the company’s annual report for 2012, it will be repaying banks and the financial institutions NIS 670 million in 2013, while repaying bondholders NIS 678 million. In other words, the repayment ratio is almost 1:1 this year.

Anticipated repayment to banks and financial institutions in 2014 is NIS 645 million, while the amount of repayment to the bondholders that year will total NIS 599 million.
Now, to repeat it owes the banks NIS 1.8 billion and bondholders NIS 4.2 billion.
In other words, by the end of 2014, IDB Development will have repaid the banks and finance institutions almost in full.

But not the bondholders, and the icing on the cupcake is that IDB Development has negative equity (surplus liabilities over assets) of NIS 239 million.

You bondholders are wondering what the Israel Securities Authority is doing about all this. Yes? The company’s report states: “IBD Development hereby states, at the behest of the Israel Securities Authority, that the ISA has not expressed agreement with the way the company’s accountant is handling the issue of the going-concern warning. The issue will be examined by the ISA as it deems necessary after the company publishes its financial report for 2012.”

In other words, the watchdog issued a warning, the company made a statement, the auditors made their note — and the bondholders will pay.

AP