Israel Corp. Weighing Massive Injection of Capital Into Oil Refineries

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The Israel Corporation is weighing a plan to inject hundreds of millions of shekels into its troubled Oil Refineries Limited unit, most likely through a rights offering, TheMarker has learned.

The giant holding company, which is trying to steady itself after a debt bailout for its Zim unit and the collapse into bankruptcy of its Better Place electric-car refueling startup, has not made a final decision about ORL. The company itself, controlled by Idan Ofer, declined to comment.

Sources close to the company say any injection of cash would have to be conditioned on a debt rescheduling with ORL's bank creditors and an agreement by its institutional shareholders to participate in the offering.

Sources in the financial markets say the minimum amount Oil Refineries, which operate giant facilities in Haifa, is about NIS 200 million.

ORL became enmeshed in financial problems in the second and third quarters after a sharp drop in refining profits, which is the differential between the price the company pays for crude oil and what it receives for its line of refined products.

ORL shares, which have dropped sharply in recent days erasing some NIS 1 billion from its market value on the Tel Aviv Stock Exchange, spiked 7.7% higher on Wednesday but retreated again Thursday to close to NIS 1.04, a drop of 1.5% and leaving it with a market cap of just over NIS 2.5 billion.

Unlike many of Israel's other big corporate debtors, ORL owes money mainly to bank and other financial institutions, working as a consortium, and not to bondholders. Its bank debt is two-and-a-half times its debt to bondholders. Moreover, bondholders are due to get most of their debt repaid in the next 18 months whereas other credits are holding long-term debt.

ORL, which is headed by Chairman Akiva Mozes and CEO Arik Yaari, has some $1.46 billion in debt to banks and bondholders combined, not counting other debt owed by its subsidiaries. Of that, bondholders account for $440 million and banks, led by Bank Hapolaim, Clal Insurance, Harel Insurance and the Amitim pension fund, account for the rest. Carmel Olefins, an ORL subsidiary, has NIS 260 million in debt to bondholders.

As of the end of the second quarter, ORL had some $110 million in cash on its balance sheet, to which can be added another approximately $111 million from the proceeds of a private placement of bonds the company made in July. In addition, ORL has had cash flows from current operations that it generates every quarter.

Against that, ORL is due to repay by the end of December some $200 million, of which $90 million is due bondholders, $55 million to banks and financial institutions and the rest as interest payments. In 2014, the company is scheduled to make repayments of some $450 million.

One source in the institutional investment sector said the unusual structure of ORL's debt puts the chances of any perspective bailout in the hands of the banks.

"The banks are the main player who will set the tone. They are already working behind the scene," he said. "What will happen isn’t necessarily the kind of bailout that we have come to know, where the bondholders were the dominant figures. ORL, it seems, will remain in the hands of its current controlling shareholders but the structure of its debt and its revenue will be directed toward funding its recovery."

The latest blow to the company came when the crisis in Syria caused global crude prices to rise, which whittled refining profits to nil. In some cases, the company was even taking a loss on many of its products as the cost of crude exceeded the price of the final goods.

Another source in the institutional investment industry said that in contrast to the big and indebted holding companies, ORL's financial woes are due to normal business risk in a company that generates cash.

"Bondholders' money wasn't used to finance buying private business jets and fat executive bonuses but for real operations," he said. "Nothing unlawful was done here, just real business risks that went bad. It's likely we'll see a recovery of refining profits in the coming quarters, which will ease the company's situation.

He said ORL bonds are starting to look attractive as an investment after a sharp drop in their price.

In the meantime, not a few people in the capital markets are ruing the losses they sustained on ORL. Among them are the institutions that bought into last July's bond offering. The offering, which came after ORL shares had already fallen some 20% in four months, was for additional Series Aleph bonds and were sold exclusively to institutional investors.

They were rated BBB-plus, meaning they carried an average level of risk, with a Negative outlook and were priced at 112.75. As of Thursday, they traded at 106.30, a loss of about 6%.

The Oil Refineries Ltd. plant in Haifa.Credit: Yaron Kaminsky
Idan Ofer in Davos, Switzerland, January 2012.Credit: Bloomberg

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