All That Glitters / Yitzhak Tshuva Triumphant

How did it happen that the institutionals howling for blood agreed for us to be bled instead?

Congratulations to Yitzhak Tshuva. After long months of negotiations and manipulations, conducted largely through the media, the real estate and gas tycoon has joined colleagues Lev Leviev and the Ofer family, signing an agreement over Delek Real Estate's debt to bondholders, that boils down to being terrific for him.

The bondholders will get a haircut, which is market argot for "they're going to lose a lot of money". A large part of Delek Real Estate's debt will be written off. Tshuva, meanwhile, gets to retain full control over the company. Bingo.

After so many months of public criticism and "uncompromising" demands by institutional investors that Tshuva either repay his debt in full or relinquish control to them, how did this happen?

That isn't the only question about the arrangement. Where exactly do the bondholders find themselves now, after the arrangement? Who won, who lost? And, perhaps most important: What message does the arrangement send to the capital market and to the other tycoons waiting in line, barber shears in hand? Here are some of the answers.

1The economic reason for the agreement's success is that Tshuva is putting a substantial sum on the table, about NIS 500 million cash, albeit spread over several years. He's also bringing another NIS 500 million in good collateral - shares in Delek Group, whose considerable assets include rights in Israel's major natural gas reserves.

In light of this injection bondholders think they'll come out better than had they asked the courts to liquidate Delek Real Estate; that would have left them with the few trimmings remaining after the banks walked away with the juiciest cuts. In the short term it's impossible to say who won and who lost, in terms of the value of the bonds managed by the institutionals.

2 The reason for the agreement's success in terms of the stock market is that a good chunk of the bonds is already out of the hands of the public, which bought them at full price when they were issued. Those bonds are now held by savvy traders who purchased them later, at bargain-basement prices. For many of these traders the debt settlement offered by Tshuva involves a handsome profit - a huge windfall, in some cases. A precise calculation is impossible, but for a swift trader who snapped up Delek Real Estate series B5 bonds during the past year at 25 agorot and is about to absorb a mere 30% haircut on their adjusted value - about 120 agorot on Tuesday - the deal reflects hundreds of percent in gains.

3 What about the public? Much of it already took its haircut ages ago, when the institutionals managing its money sold the bonds at rock-bottom prices, locking in enormous losses. The institutionals sold out to avoid being forced into awkward negotiations with Tshuva under the media spotlight, and to avoid finding themselves, heaven forbid, actually running the company if it went into receivership. They wouldn't know what to do with this kind of company.

But in the end, many of the institutionals hurt their membership base twice: First when they bought high, without security, and again when they sold low and passed up the injection Tshuva would later make in the company.

4 Tshuva won't pay it all right away: It's a type of option. The big money he committed, in exchange for the haircut, will be spread out over more than 10 years. And what if, three or five years down the road, he doesn't have the money he committed to paying? Then he won't, and might ask for another debt settlement. There is no finale to the story, and to a large extent Tshuva is merely kicking the hot potato further down the road.

5 Everything's negotiable. Remember Tshuva's initial offer? We checked: NIS 250 million. But even then, judging by Tshuva's smirk and body language, this was clearly just a lowball offer, an opening position. In the end he signed up for nearly NIS 1 billion - four times the initial sum.

6 The settlement will allow Tshuva to avoid the courts and the accompanying public exposure and further investigation into Delek Real Estate. For Tshuva, that is presumably the plum in the pudding and well worth the hefty price. After all the media scrutiny of the past several months everyone now knows about the questionable dealings in Delek Real Estate's history. Just last week, in fact, the Attorney General's Office announced the imminent indictment of Former Delek Real Estate CEO Ilik Rozanski for cooking the company's books to inflate the value of its deals. Tshuva is very anxious that such matters, and others, do not come under scrutiny.

7But the biggest problem with the arrangement is the message it sends to the capital market and to other business barons who borrow from the public: Debts don't need to be paid. If you can't, or don't want to, make good on them, arrangements can be made.

Tshuva is following Leviev with Africa-Israel Investments and Ofer with Zim Integrated Shipping Services to set the standard for Israel's capital market. From now on, anyone who runs into trouble repaying their loans from the public can tell creditors: "I'll do as Tshuva did, what's wrong with that?" Once again the Israeli public missed the opportunity to leverage a crisis into genuine reform, to create a different management culture. It could have told Tshuva "no thanks," assume ownership of the company, examine and investigate it, making it clear to tycoons and securities traders that there is a real price to pay for not returning the money taken from the public's retirement savings. What a pity.