Bottom Shekel / Ilan Ben-Dov's Honeymoon Is Over

Investors have been dumping shares and liquid bonds in Ilan Ben-Dov's investments vehicle Tao Tsuot, sending the stock tumbling tens of percentage points since the beginning of the week. Tao Tsuot has been reduced to trading at a miserable market cap of NIS 81 million, after approaching nearly half a billion shekels exactly a year ago. The company's bonds have also nosedived, and are trading at junk yields of over 20%.

What happened to Ben-Dov has happened to many other businessmen around the world who rode the bull market and inflated the value of their companies by buying shares and assets - which they paid for by borrowing heavily. Ben-Dov was no exception and his shopping spree amounted to NIS 2 billion, of which he borrowed NIS 1.5 billion.

When the markets are flourishing, everything looks rosy and everyone is happy happy happy. But when the value of the purchased assets sinks like stones, and the owner can't sell them for love or, hopefully, lots of money, and there are no dividends in the offing, and when shareholders' equity gets wiped out - a company's value bottoms out. And then the chance that debt will be paid off is very low.

The problem now is that the redemption date for the bonds Tao Tsuot issued is fast approaching. That increases the stress factor for investors, who know that under current market conditions neither Ben-Dov nor anyone else will be able to raise funds to roll the loans over.

Immediately after the publication of Tao's shocking financial report late last week - with quarterly losses of over NIS 200 million - Tao offered bondholders a kind of debt arrangement: the conversion of the bonds to (lots of) shares and (a little) cash.

The offer is still on the drawing board, but the idea behind it is that instead of repaying the NIS 460 million it borrowed from the market, Tao will turn the bondholders from creditors into owners.

Tao's new financial trick kills two birds with one stone - reducing the debt and at a particularly low price. After all, Ben-Dov will pay the bondholders the bonds' current market value - about half their purchase price. The typical investor who fears for the fate of his bonds may prefer to accept Ben-Dov's offer and cut his losses, and Ben-Dov is exploiting this.

Ben-Dov's short honeymoon with the capital market is about to end on a sour note, but it actually won't be so terrible for him or his right-hand man, Yossi Arad.

Ben-Dov, who has hundreds of millions of shekels in his bank accounts, will not repay the loans in full and will not dig into his own pockets, either. How ironic that in its previous existence Tao was called Yarden, and crashed with Roy Gill and Eitan Eldar in an almost identical fashion, in the 2003 capital-market crises.