Africa-Israel Facing Stormy Waters

The time has come for Lev Leviev to decide whether to pour in more money.

Africa-Israel Investments could soon be heading into another financial cyclone. In a report issued by the company this week, doubts were raised for the first time as to whether controlling owner Lev Leviev will continue supporting it with cash infusions.

Under the terms of the company's debt restructuring agreement hammered out in May 2010, Leviev was to inject a further NIS 250 million in two installments - in May 2013 and May 2014 - after having already pumped NIS 500 million into the company in two previous payments.

"It should be noted that under the terms of the arrangement, if the controlling owner decides not to carry out the capital investments [i.e. the NIS 250 million] his holdings will be diluted according to the base share price as defined in the settlement: NIS 36.10 per share," according to the projected cash flow statement accompanying a newly-revised shelf prospectus.

The implication is that Leviev isn't required to pony up the sum and that it's nothing more than optional from his point of view. If he decides not to, his share of the company will be reduced from 48% to 45%. But he could also avoid seeing his share diluted by buying stock on the open market for NIS 36 million, so this doesn't serve as an incentive for him to lay out the NIS 250 million.

Africa-Israel is currently trading at just NIS 8.86, less than a quarter of its price at the time of the settlement, having dropped another 4% in yesterday's trading. The company's market value is down to just NIS 1.2 billion and its bonds are trading at 13% yields.

Meanwhile the company is struggling, with its assets in Russia declining in value and projects being stalled. It is also highly exposed to the real estate market of Eastern Europe.

The projected cash flow outlined how the company will pay down NIS 1.4 billion in debt by the end of September 2014, and nevertheless included the NIS 250 million cash injection as one of its sources of cash.

The prospectus was issued in connection with the swap offer being extended to Africa-Israel bondholders. The company is offering them early repayment of 18% of their principal next month, against scheduled payments of the principle currently due from the balance of 2013 right through to 2015. The swap will entail cash payments of up to NIS 520 million. The company sees this as a good way of putting its plump NIS 867 million cash reserve to use - by keeping creditors at bay for the next few years.

Feeling like a chump

Leviev, as far as known, doesn't personally have any liquidity problems at this time. His private diamonds, mines, real estate and industry enterprises are flourishing once again.

A month ago he even paid off a total of NIS 350 million in loans from Israel's five major banks through Mamorand, Africa-Israel's parent company. This amount was actually NIS 100 million more than the payment that was due in order to short up collateral. There are some in Leviev's circle who say he feels like a chump for having put NIS 500 million into Africa-Israel while other tycoons barely lifted a finger to bail out their struggling companies.

He has also repaid about NIS 1.5 billion in bank loans since the May 2010 debt settlement. While Africa-Israel has become a relatively part of his asset portfolio, Leviev is nonetheless still devoting much of his financial and managerial resources to the company. It may therefore appear that he wouldn't much mind having his stake in the company diluted. If Leviev doesn't participate in Africa-Israel's rights issue, the feeling in the capital market is that the public will also stay away.

These offerings are meant to bring the company about NIS 600 million over the next two years. Such a scenario would put Africa-Israel in a tight spot with regard to sources for funding the repayment of its debts, and it would likely need to unload additional assets, including perhaps shares in Africa-Israel Industries and Africa-Israel Residences. Africa-Israel Investments refused to comment.