Hapoalim Confronts Beny Steinmetz

Gives mining baron's company Scorpio 10 days to repay NIS 355m

Banks are usually conservative beasts. If they must confront a client, they do it behind closed doors. Discretion, that's the name of the game. But sometimes they do operate out in the open, and on Tuesday, Bank Hapoalim opened a front against mining and property baron Beny Steinmetz, who is believed to be worth billions of dollars.

The bank's negotiations over repayment of NIS 355 million lent to Steinmetz's real estate company Scorpio went nowhere. Now Hapoalim has given Scorpio 10 days to repay, the company reported to the Tel Aviv Stock Exchange. Hapoalim has also canceled credit lines to Scorpio.

As far as is known, alongside Steinmetz, the negotiations are being conducted by David Granot, his chief business manager and former CEO of First International Bank of Israel.

The money was lent to Scorpio when Zion Kenan, today the bank's CEO, was head of corporate banking.

Hapoalim claims that Scorpio's condition has badly deteriorated and that Scorpio is violating its financial covenants, the real estate company says in its notice to investors.

Nearly two weeks ago, Scorpio announced that it couldn't make the first payment of principal due to bondholders - NIS 120 million that it was supposed to hand over on April 30. That admission boils down to confirmation of bankruptcy.

Understanding that Scorpio is broke, Hapoalim demands that if it can't repay the loan itself, its parent company Scorpio BSG should do so, since the parent company had guaranteed Scorpio's liabilities to the bank, without limit in sum.

Yet Hapoalim is aware that the guarantee isn't worth much because Scorpio BSG doesn't have much cash or anything else. Its only asset is Scorpio Real Estate.

In other words, if his companies won't do it, Hapoalim is demanding that Steinmetz himself repay the loan.

That demand is probably based on signals from Steinmetz and his advisers that he would stand behind Scorpio's liabilities.

At this stage, however, Steinmetz is refusing. He has told Scorpio that the bank's claims are baseless and that the only one guaranteeing its liabilities is the parent company.

"It is regrettable that at the height of positive negotiations with bondholders and with Bank Hapoalim, the bank unnecessarily decided to go public," a Scorpio spokesman said.

In fact, Steinmetz is simply relying on the definition of a Ltd. company - limited by shares. He is signaling that he doesn't intend to personally stand behind Scorpio and inject his own money, nor does he have to.

Steinmetz is evidently prepared to forgo NIS 380 million in owner's loans that he gave Scorpio - that's peanuts compared with his sprawling business empire, which is worth tens of billions of dollars.

Just two weeks ago Steinmetz pulled off a giant exit. His company BSG Guinea sold a 51% stake in mines in Guinea to Brazilian company Vale for $2.5 billion.

If anything, the personal wealth of $2 billion that TheMarker Magazine estimated for Steinmetz in its latest "500 Richest" edition may have erred on the downside, a crony of his told TheMarker.

Hapoalim hasn't disclosed its next step. It may sue to liquidate Scorpio Real Estate. If matters reach bankruptcy court, Hapoalim will run into the company's bondholders, who lent it NIS 516 million in January 2007 and who, following Scorpio's misadventures in the eastern European real estate market, aren't getting their money back. The debt to Hapoalim has seniority over the debt to the bondholders, who have no securities backing the bonds.

It seems that Hapoalim simply moved before the institutional investors that bought the bonds. The bondholders representation consists of people from Psagot, Migdal, Clal Insurance, Menora and Phoenix. The representatives of Psagot and Migdal are reportedly on the belligerent side, and weeks ago urged that the debt be recalled immediately. The others counseled patience, to give Steinmetz a chance to reach an arrangement with them.

Some sources in the capital market say that if Steinmetz doesn't stand behind his company, he'll have trouble raising money the next time he tries. But others shrug that he's simply doing business.

"Apparently, unlike Yitzhak Tshuva, who stands behind his companies based on the consideration that he'll need the Israeli capital market in the future again, Steinmetz is less concerned about that," said a source at one of the institutional investors. "But Hapoalim can only blame itself for extending such a bad loan, if it really turns out that Steinmetz didn't give a personal guarantee."