Tel Aviv, We Have a Problem

Lev Leviev's Africa Israel Investments owes Israel's banks more than NIS 14 billion in long-term and short-term liabilities, and the bankers are evidently growing nervous about the huge amount. Within days the two biggest lenders, Hapoalim and Leumi, are expected to receive rights to yet more shares in the Africa Israel parent company to secure the debts.

"It's incredible. It looks like something is going down that we know nothing about," exclaimed a market player on Tuesday, as shares of AFI Development, the Russian operations subsidiary of Africa Israel Investments, plunged 17%. For the second day in a row, that is. Moreover, AFI dived against an uptrend in the markets. Clearly, investors are jittery.

Indeed, the entire Lev Leviev group of real estate companies seems shrouded in uncertainty as the credit crisis shakes the financial markets of the world and sends real estate markets reeling - especially in the United States and Russia, which are key spheres of action for Leviev.

It turns out that not only investors are losing sleep over holdings in Leviev's companies. So are Israel's big banks, Hapoalim and Leumi. Leviev is being asked to buttress the securities backing loans to his group by giving the banks liens on an addition 10%-20% of Africa Israel's shares.

Just a week and a half ago Leviev bougt back NIS 600 million worth of Africa Israel bonds that had been backed by the shares. The shares evidently won't stay unencumbered for long.

Following the increase, the banks will have attachments to 75%-80% of Africa Israel's stock.

Bank Hapoalim has rights to more than 50% of Africa Israel's stock. Most of the rest of the attachments belong to Bank Leumi.

Market sources surmise that the shares in the Africa Israel parent company aren't the only security that the banks hold to back their loans to the Leviev group.

In its financial statement for the second quarter of 2008, Africa Israel disclosed NIS 6.5 billion in long-term liabilities to banks. It owes another NIS 7.7 billion in short-term liabilities. And beyond that, Africa Israel owes another NIS 9 billion to bondholders.

So far Africa Israel has apparently made all its payments due to the banks, and there has been no difficulty regarding repayment of debts by the company or by Leviev himself. The problem isn't one of reliability, it's the eroding share price of Africa Israel Investments and its subsidiaries, notably AFI Development.

The Africa Israel group commented that it has no problem providing additional collateral to any bank, in Israel or abroad, if required.

In the last week of September Africa Israel suffered the indignity of a three-notch credit downgrade, which it summarily rejected as the result of shoddy work by credit rating agency Maalot S&P. The credit rating agency had cut its grade from AA to A/Stable, relating to more than NIS 7 billion worth of debt. While about it, Maalot also downgraded subsidiary Africa Israel Properties to A/Stable. Delek Real Estate did not voice similar complaints about its own downgrade this week.

Noting the company's exposure to the credit crisis and heavy loan burden (like Africa Israel), the deterioration in its liquidity and its high exposure to property markets in crisis (such as Britain), Maalot S&P on Sunday warned that it had downgraded two series of Delek Real Estate bonds from A+ to A-minus, with a negative outlook at that. That means another downgrade could be in the offing.

There is one similarity between the cases of Africa Israel and Delek Real Estate - the belated action by the credit rating agency. Investors had long been pricing the two companies' bonds at junk levels. Before the Rosh Hashanah holiday, Delek Real Estate bonds were trading at junk yields of 34%, reflecting a lack of confidence in the ability of Yitzhak Tshuva's company to repay debt.

Delek Real Estate has a steady income stream from quality properties in Western Europe and Canada. But Maalot is worried that the income is low compared with the debt that the company took on to buy the assets.

Delek Real Estate's consolidated statement shows current 2-year liabilities of NIS 2.4 billion, of which NIS 450 million are owed to bondholders - a sum it means to repay out of cash inflow, bank loans and sales of assets.

Maalot estimates that Delek Real Estate, run by Ilik Rozanski, has NIS 600 million in cash and equivalents, NIS 800 million worth of unencumbered assets and NIS 800 million in available credit. It also owns about NIS 350 million worth of shares in Eliezer Fishman companies Darban and Industrial Buildings.

Delek Real Estate said it respects the decision, though it disagrees with many of the considerations, and notes its portfolio of quality assets rented in long-term leases to quality tenants, which were financed through fixed-interest long-term loans.