Suny bondholders trapped

Ilan Ben-Dov's company has been de facto insolvent since missing a bond payment in June, and it has no cash

Suny Electronics Ltd. (TASE: SUNY), controlled by Ilan Ben-Dov, has been de facto insolvent since missing a bond payment in June, and it has no cash. On Monday, the company announced that it could not meet next month's NIS 67 million in interest and principal payments on three bonds. The next day, Midroog Ltd. took the next step, analyzing the expected return for bondholders if Suny is liquidated.

The analysis was made as part of a downgrade of Suny's bonds one grade to C - the lowest grade above insolvency, and with little chance of repayment of the principal or interest. Midroog reviewed Suny's assets, the most important of which is a 78.7% stake in Scailex Corporation (TASE: SCIX; Pink Sheets:SCIXF), the controlling shareholder in Orange franchisee Partner Communications Ltd. (Nasdaq: PTNR; TASE: PTNR), which is shortly due to be sold to Haim Saban. These shares are wholly attached to Suny's bondholders.

Suny also directly owns 1.4% of Partner, and this holding is attached to Mizrahi Tefahot Bank (TASE:MZTF). Suny also owns 56% of Internet portal Tapuz People Ltd. (TASE:TPUZ), 0.5% of vehicle safety systems company Mobileye Inc., and a few million shekels worth of Scailex bonds.

Suny's assets are worth NIS 218 million, and its financial debt is NIS 281 million, of which NIS 254 million is owed to its bondholders, and the rest is owed to Mizrahi Tefahot Bank. Suny's bonds are traded at an average price of NIS 0.40, for a yield of up to 250%. Although deducting the assets from the liabilities results in a return of 75% of the financial debt, Midroog believes that the actual return will be less, and similar to current price at which the bonds are traded on a par basis.

"At the expected loss estimate, we believe that the value of the assets under distress conditions will be less than their current market values, and we take into account the administrative expenses of liquidation," says Midroog.

Between the hammer and the anvil

Suny's bondholders are caught between the hammer and the anvil. On one hand, they would prefer not recalling the debt immediately and liquidation of the company, in order to prevent jeopardizing the deal with Saban (which could create value for Scailex shares, Suny's main asset, in the future). On the other hand, Ben-Dov has said that he has no intention of contributing to a future debt settlement, saying that his contribution is the added value that he brings to management. The bondholders also fear that if they recall the debt, which will result in Suny's liquidation, Samsung is liable to take away Scailex's license to import Samsung devices, which will be Scailex's main asset after selling Partner to Saban.

Suny is calling the period until the closing of the Saban deal, due by February 2013, as an "interim period", and has asked its bondholders not to take any action until the deal is closed. The bondholders are demanding that Ben-Dov should finance Suny's operations during this period, at a cost of NIS 2-3 million, but the parties have not reached an agreement.

Expected loss of NIS 40-80 million

Yesterday, Scailex summoned an urgent general bondholders meeting to approve the Saban deal. Under the deal, Saban is due to buy two-thirds of Scailex's stake in Partner (30.7% of Partner) for NIS 250 million. Saban will also assume Scailex's $300 million debt to Hutchison Whampoa Ltd. (HKSE: 0018). Scailex will be eligible to its share of the dividend that Partner will distribute from its profits for 2012, from which it could receive up to NIS 115 million.

The bondholders meeting is scheduled for Monday, December 17. 75% of the bondholders are needed approve the deal, and Scailex believes that it has the necessary majority, because the deal is better than any alternative, and no other deal is available. Scailex also announced that with the signing of the acquisition agreement, there is a strong probability that the deal will be closed, and that it will report its Partner activity as "discontinued activity" in its profit and loss statement for the fourth quarter of 2012.

Scailex estimates it will report a loss to shareholders of NIS 80 million in its financial report for the fourth quarter from the total accounting impact of the deal. But if Scailex receives the full dividend due under the deal (NIS 115 million), the loss to shareholders will be reduced to NIS 40 million. The impact on Suny's financial report will be proportionate to its 78.7% stake in Scailex, which means that it will report a loss of NIS 32-64 million for closing the deal.

Published by Globes [online], Israel business news - www.globes-online.com - on December 13, 2012

© Copyright of Globes Publisher Itonut (1983) Ltd. 2012

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