Isras Sold Off Bonds Days Before Subsidiary's Going Concern Alert

A going concern warning is no simple event in the life of a company. It means that cash flow is so tight the company is in danger of total collapse. Such warnings are, therefore, issued by accountants only after weighty consideration of all aspects of an enterprise.

On March 15, 2010 Ocif Investments & Development announced the likelihood of the inclusion of a going concern warning in its 2009 financial report.

This was not the only noteworthy recent announcement concerning Ocif. In the five days prior to the going concern announcement, Ocif's mother company, Isras Investments, announced the sale of NIS 50 million in Series B5 bonds in three separate transactions.

Shlomo Eisenberg, the controlling shareholder in Isras, not only controls Ocif via Isras, he is also the head of business operations at Ocif. The going concern warning and Eisenberg's recent comment at the Ocif bondholders' assembly that the company had no money to pay bondholders, combined with Ocif's current market value, (less than half the purchase price Isras paid), and the likelihood increases that Isras is planning to write off its investment in Ocif. The timing of the bonds sales by Isras could have been just right.

Isras acquired the controlling stake in Ocif from Bank Leumi, which had confiscated the shares from Russian-Israeli tycoon Arcadi Gaydamak in late 2008. At that time, Isras purchased 67% of Ocif for NIS 135 million.

Isras behavior seems to indicate that from the company's point of view, there is no connection between Ocif's going concern warning and Isras. The mother company is testing the market. Ocif reported the anticipated going concern warning a week ago last Monday, but this had no effect on Isras' bonds the following day. In the ensuing two days Isras' share price actually gained 1%.

Even so, Isras shareholders are not completely complacent about the situation at Ocif. From March 7 - when Ocif bondholders were invited to a meeting to discuss ways for collecting the debt owed by Ocif and the possibility of calling for the immediate redemption of the bonds - until March 15, Isras' share price shed 12%.

Another consideration at Isras is the substantiveness of the announcement regarding Ocif. As of September 30, 2009, Isras' balance sheet totaled NIS 4.8 billion, and the company's equity was about NIS 1 billion. Thus, Isras might view its investment in Ocif as insubstantial.

Still, in light of the fact that Isras' revenue for the first three quarters of 2009 was NIS 571 million; that the company's pretax losses were NIS 73 million; and net losses for that period were NIS 3.3 million, it is unclear whether a write-off for the investment in Ocif would indeed be insignificant for Isras.

Aside from these points is the limited responsibility a controlling shareholder in a company has concerning a subsidiary. In other words, Isras is ostensibly not responsible for the situation at Ocif. For this reason Isras' maximum exposure to Ocif is to total sum invested in Ocif - NIS 135 million.

The market test and the issue of the substantiveness are excellent explanations for the lack of any connection between Eisenberg's sale of bonds and Ocif's going concern warning. Still, the question remains whether Isras (which did not know about the warning Ocif would be issuing) should have waited with the bond sale until after the publication of the annual financial reports. On Tuesday, following an inquiry by TheMarker and a 10-day hiatus in the sale of bonds, Isras again put NIS 17 million worth of bonds on the market.

"The financial might of Isras, as presented in the third quarter 2009 statement, is expressed in part by the company's equity, which was NIS 1 billion on September 30, 2009," responded a spokesman for Isras. "The company's exposure to occurrences at Ocif is limited, and will be specified in more detail in the annual report to be issued in the coming days. As for the sale of Isras' Series B5 bonds, the fact that the market price of the bonds remained stable proves that the capital market is aware of Isras' financial strength and Isras' limited exposure to what is happening at Ocif. The sale of the bonds by Isras is continuing without any change in the price. Today, too, the company sold NIS 15 million (face value) in Series B5 bonds on the bourse."

Isras is due to issue its 2009 financial report this coming Sunday.