The financial report published by Gmul Investment Co. Ltd. (TASE: GMUL) last week did not offer good news for the company's bondholders. Barely three years after the company signed a debt settlement, its bondholders seem set to suffer another loss on the NIS 200 million balance.
Gmul, which has a market cap of just NIS 3 million, adjusted its business performance to the severe financial conditions in recent years. The financial report states, "The company's management believes that, from June 2017, the interest and principal payments on the bonds are liable to exceed the company's cash flow from its assets." It goes on to say, "In the past few months, there have been talks between the company's management and the bondholders' representative, in which management presented the representative with several alternatives for changing the repayment dates and amounts, and to increase the collateral for the liabilities."
The yield on Gmul's bonds of over 50% indicates that the bondholders believe that there will be one. If and when Gmul requires another debt settlement, it is clear that controlling shareholder Leon Recanati will not inject more money into the company to support it.
Recanati, once a controlling shareholder in IDB Holding Corp. Ltd. (TASE:IDBH), acquired control of Gmul in early 2008 at an insane premium of over 100% on its market cap, in a deal at a company value of NIS 630 million. His timing was particularly poor - just before the global economic crisis. Less than a year after the acquisition, he was the first prominent businessman to seek a debt settlement with bondholders. "I've made any number of deals in my lifetime, and this was the worst deal of my life," he admitted during a bondholders meeting. "I cannot invest more money."
After several months of negotiations, the parties reached a settlement that included a substantial dilution of Recanati's holding in Gmul in favor of his creditors. He subsequently sold half of his remaining shares to Yitzhak Gvilli, accepting a huge NIS 400 million loss on his investment in the company.
Recanati may have become a source of ridicule and abuse in the business world, but to his credit, from the moment he admitted that he lacked the wherewithal and desire to continue financial support of Gmul, he stepped aside and forewent the pretense of running the company.
Such honorable conduct is hard to attribute to many tycoons, such as Yosef Maiman at Ampal-American Israel Corporation (Bulletin Board: AMPLQ; TASE:AMPL), Hertzel Habas at Habas HZ Investments Ltd. (TASE: HABS), Mordechay Zisser at Elbit Imaging Ltd. (Nasdaq: EMITF; TASE: EMIT), and Ilan Ben-Dov at Suny Electronics Ltd. (TASE: SUNY). On one hand, they insisted on continuing to run their companies even after their failures and inability to meet their commitments, while on the other hand, they neither want nor can provide the substantial investments (either personally or from an external source) for the debt settlements they offered their creditors.
The emerging practice of debt settlements in the Israeli capital market cannot accept such offers. The men who burned hundreds of millions of shekels of the public's money in bad or irresponsible investments cannot pass the buck onto their creditors and keep their jobs, on the pathetic excuse that there is no one who knows the companies' assets better than them.
For the bondholders, a respectable financial contribution by the controlling shareholder or another party on his behalf should be a threshold condition for the controlling shareholder keeping his job after a debt settlement.
Published by Globes [online], Israel business news - www.globes-online.com - on April 9, 2013
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