Auditors: Israeli Holdings Powerhouse IDB on Brink of Default

Undermined by losses at Credit Suisse, Super-Sol and Maariv, among many others, prominent Israeli businessman Nochi Dankner's flagship company forced to include going-concern warning in Q2 financials.

Despite its best efforts, IDB Holdings had a going-concern warning included in its second-quarter financial reports, indicating that its auditors believe it is on the brink of bankruptcy.

IDB, which is controlled by Nochi Dankner, published its financials on Friday afternoon, a few hours short of the final deadline for filing second-quarter financials. Its auditors are KPMG Somekh Chaikin and BDO Ziv Haft.

The company lost NIS 1.27 billion that quarter, it reported.

This is the first time that IDB, formerly the largest, strongest company in Israel, has had to file a going-concern warning. In response, credit-rating agency S&P Maalot cut IDB's rating to CCC with a negative outlook, which is below investment grade for the institutional investors - meaning they might be selling off its bonds in bulk.

Maalot cited the company's dwindling liquidity and growing concerns that the company could miss debt payments within the next year, and noted that it would be reviewing the ratings of other companies within the group.

"I'll do everything possible to protect those who invested in the group," stated Dankner in response. Dankner also serves as IDB's chairman.

In May, Dankner stated that IDB had enough liquidity to cover its obligations for the next two years and that he had no intentions of renegotiating the company's debt. But since then, it emerged that the company had cash to cover debt payments only through June 2013 - less than a year from now.

The company still has no intention of heading toward a debt settlement.

"Despite the inclusion of a going-concern warning, the company is able to continue operating and thus to pay off its debts," it stated explicitly in its board of directors' report.

In another sign that IDB intends to keep projecting business as usual, it did not change the classification of its short-term and long-term debts, as is customary in cases when going-concern warnings are attached to a company's financials.

Bondholders call emergency meeting

The company has said it intends to meet a NIS 35 million payment to bondholders this week. In total, it owes NIS 1.7 billion to bondholders and another NIS 300 million to banks.

Representatives of the company's four bond series have a general meeting called for 10 A.M. tomorrow morning in order to decide how to respond. Courses of action could include pushing the company into a debt settlement or demanding immediate repayment.

"If Dankner and partners don't give the company NIS 35 million [to make the upcoming payment] as a start, that raises questions about how serious they are. Dankner's case is different from those of Yitzhak Tshuva and Delek Real Estate [which is also embroiled in a debt settlement]. While Tshuva is willing to pay NIS 750 million in order to save his reputation and keep a hopeless company, Dankner's IDB Development should be able to pay off most of its debt if managed properly. As opposed to Tshuva, Dankner apparently doesn't have this kind of cash on hand, so he would be better off handing over control to the bondholders as soon as possible," said a senior official at an institutional invested in IDB bonds.

In such cases, "you leave the owner in place if he offers added value in terms of the company's business operations or if he's willing to inject significant sums of money. In Dankner's case, neither condition holds," stated the official.

IDB subsidiary IDB Development has another NIS 2.2 billion in bank debt. The largest chunk - NIS 750 million - is to Bank Hapoalim.

The Bank of Israel has been following the situation at IDB, and instructed the commercial banks to write off their loans to the company as bad debt. The banks have already written off NIS 1.7 billion in loans to Dankner as bad debt, so they are unlikely to sustain too much additional damage if the company now defaults, said a senior banking sector official.

Brought down by competition

IDB Holdings' situation deteriorated over the past several years due to a string of poor business decisions, which included a second, failed investment in Credit Suisse shares; an investment in the Plaza Las Vegas real estate development; and the acquisition of struggling daily Maariv.

But what brought the company to the brink of collapse was the sharp drop in revenues from former cash cows including telecom company Cellcom, supermarket giant Super-Sol, Clal Insurance and Nesher cement works. Until recently, most of these companies operated in noncompetitive markets.

IDB Holdings finished the second quarter with a lost of NIS 1.27 billion, compared to a loss of NIS 883 million in the parallel quarter of 2011. It lost a total of NIS 953 million in the first half of the year, compared to NIS 804 million in the parallel period last year.

Most of IDB's losses came due to the loss in value of Credit Suisse shares. It holds 2.3% of the bank through subsidiary Koor; due to heavy losses at Maariv; a write-down due to losses at Super-Sol; dropping profitability at Cellcom and Clal Insurance; and high financing costs.

Due to the loss, its deficit in capital attributed to shareholders grew to NIS 1.66 billion.