IDB Development Secures NIS 300m in Financing From Menora, Bereshit

But IDB group has little to celebrate as shares sink on heavy debt load.

Michael Rochvarger
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Michael Rochvarger

IDB Development has closed a deal for NIS 300 million in debt financing from two lenders, as shares in its parent company, IDB Holdings, sunk to a new annual low amid the group's growing debt load and onerous financing terms.

Half the amount will be provided by the Menora Mivtachim Holdings group and the other half by the Bereshit leverage fund, it was disclosed Tuesday.

IDB Holding CEO Haim Gavrieli. Credit: Tomer Appelbaum

The ninth anniversary of Nochi Dankner's acquisition of control over the IDB group, together with the Livnat and Manor families, from the Recanati and Carasso families comes up in two weeks, but Dankner has little reason to celebrate at this stage. IDB Holdings shares dropped 4% Tuesday for a 74% collapse over the past 12 months, continuing sharply downhill again in yesterday's trading while lowering the company's market value to under NIS 1.2 billion. This is also bad news for Bank Leumi, which now holds as security shares in the company now worth just NIS 359 million, against NIS 500 million owed by Ganden Holdings, IDB's parent.

The NIS 150 million in the public's savings managed by the Menora insurance and finance group, under the direction of CEO Moti Rosen, being proffered to IDB - along with the same amount from the Bereshit fund - will go to partially defray NIS 1.5 billion in payment obligations to banks and shareholders over the remainder of this year.

In consideration for the loans, however, options are being given for shares in IDB subsidiaries, and liens put on some of the group's assets. This will reduce IDB's freedom to maneuver while boosting its leverage - something bondholders, especially holders of long-term series, aren't thrilled about.

IDB Holdings series B4 bonds, with a 4.6-year duration, fell 4.2% Tuesday to a 21.46% junk yield to maturity, while 2.45-year duration IDB Development series B7 dropped 2.9% to a 14% yield to maturity. Overall, the yields at which the total NIS 6.3 billion in bonds of IDB Holdings and IDB Development are trading don't support the A ranking given to the companies by credit rating agency S&P Maalot.

On Tuesday's announcement on the loans, IDB outlined the terms but didn't name the lenders, referring to them as "Corporation A" and "Corporation B" instead. The company provided only the basic interest rate on the loans, without specifying the effective rate that factors in the equity components of options on shares in group subsidiaries. In a similar case in July 2009, Kardan Israel disclosed a weighted interest rate of 9.5% - 2% higher than the basic rate it had reported several days earlier - at the insistence of the Israel Securities Authority.

The agreement with Menora

The loan from "Corporation A," Menora Mivtachim, will be linked to the consumer price index and will carry a 6.9% interest rate payable quarterly. NIS 50 million of the principal amount will be repaid in 2017, with the balance due in 2018.

Under the agreement IDB Development is giving Menora options on 1.7% of the share capital in Discount Investment Corporation, whose holdings include Cellcom Israel, Super-Sol and the Property and Building Corp. The options, which expire in May 2016 and can be exercised at NIS 25 per share, are currently out of the money, with Discount Investment now trading at around NIS 19 per share after plunging 74% over the past year. Whether the options are exercised in cash or shares will be at the discretion of IDB.

The effective interest rate of the loan is 9%. But this interest rate is based calculations using the simple "naive" model for pricing options, relating to the difference between the stock's market price when exercised and the option's exercise price. Assuming the stock recovers to a level of up to NIS 46 per share ceiling, the effective interest rate could reach as high as 13%.

IDB Development will also give Menora a lien on shares of Discount Investment, Clal Industries and Investments, and Clal Insurance Enterprises Holdings, in a mix agreed to between the sides that will bring their total trading value to 150% of the loan. It was also agreed that any time this ratio falls below 150%, additional shares will be liened to bring coverage up to 167%. These shares can be used as security on condition that control over these companies remains unchanged. This is a relevant point since IDB has already held negotiations with the Viola Group over the sale of Clal Industries, and with the European Permira fund over the sale of control in Clal Insurance.

Bereshit's conditions

"Corporation B," the Bereshit fund, is one of three leverage funds established under state auspices in early 2009 to assist companies in trouble. The fund is headed by Gabriel Perel, former CEO of the IDB group's Clal Finance investment house and deputy-CEO of IDB Development.

Conditions pertaining to the NIS 150 million loan are generally similar than those on Menora's loan. The principal amount, however, is to be repaid earlier - NIS 50 million in 2015, and NIS 100 million in 2016. The Bereshit fund will receive the same options as Menora, and the effective interest rate here too could reach 13% under the right circumstances.

The loan is secured by liens on Discount Investment and Clal Industries shares, in a mix of the lender's choice, amounting to more than 135% of the loan based on closing trading prices, or more than 130% based on an average of the closings of the previous 30 trading days. Whenever the total market value falls to below 123% of the loan amount, additional shares of the two companies will be pledged to bring the overall ratio back up to more than 135% of the closing rates, or 127.5% according to average closing prices over the previous 30 trading days.

IDB Development will also be subject to loan covenants similar to those applied by other lenders, primarily Bank Hapoalim and foreign banks. According to these, the net debt of IDB Development on an unconsolidated basis and its fully owned subsidiaries cannot exceed NIS 6.7 billion.

IDB Development is entitled to repay either of the loans earlier than required, subject to payment of an early repayment fee.