IDB share plunge unsettles bondholders

Moti Ben-Moshe and Eduardo Elsztain
Moti Ben-Moshe and Eduardo Elsztain

The bondholders have joined forces under "The Organization for Defense of the Public's Savings" and are considering legal action.

The private bondholders in IDB Holding Corp. Ltd. (TASE:IDBH) have joined forces under the name "The Organization for Defense of the Public's Savings.," and are considering legal measures.

Less than a year after control of IDB was transferred in the framework of a debt arrangement, investors in the company's securities are worried again. It appears that the negative sentiment towards IDB securities over the past month is of particular concern to the private bondholders, who are currently considering their options for action against Moti Ben-Moshe and Eduardo Elsztain, the new controlling shareholders, including legal measures.

In a letter published yesterday, Ohad Aloni, who represents some of the private bondholders, wrote, "Something is unhealthy in trading in the share, and something is unhealthy in the behavior of the company's management and controlling shareholders. Something is has gone wrong with faith in the controlling shareholders and the way they are steering the ship, and the illness lies in the uncertainty in the market."

It appears that the deterioration in relations between the two controlling shareholders, and their lack of success in moving ahead with significant measures in the IDB Group's companies since they acquired control, are exacerbating investors' fears about the group's future. These fears were reflected in a drop of over 20% in the company share price in the past month, completing a loss of a quarter of the company's market cap since trading in the share resumed in May. The market cap is now NIS 950 million, and the negative trend has picked up speed in recent days, with the IDB share down 13% for the week.

Steep declines have also recently characterized trading in IDB Development Corporation Ltd. (TASE:IDBD), and these declines have also accelerated in recent days, propelling yields on the bonds to 14% - figures reflecting a growing loss of confidence on the part of the bondholders in Ben-Moshe and Elsztain's ability to bring about a substantial change in IDB's financial situation.

Aloni says, "Over nine months have passed since the controlling shareholders were notified that their investment proposal was accepted - far more than the usual 100 days grace period, and they have yet to speak. Not a single presentation has been made that could indicate what the agenda is, what the controlling shareholders' work plans are, and where they are steering the ship."

NIS 1.2 billion invested to date

IDB said in response, "The IDB Development controlling shareholders have met all their obligations under the arrangement, and have invested nearly NIS 1.2 billion in this framework. They intend to continue fulfilling all their commitments in the future according to the provisions of the arrangement."

Only a few months ago, the picture looked completely different. The debt arrangement in the group was finally signed in May, and the first stage in it was completed with a NIS 650 million injection into IDB Development. Ben-Moshe and Elsztain have contributed to date the huge sum of NIS 1.2 billion.

At the end of the current year, a rights offering of unspecified volume is planned for the purpose of reinforcing the company's capital and liquidity. The controlling shareholders have undertaken to transfer an additional NIS 500 million to IDB Development in 2015. Their obligations under the debt arrangement also include an offer to purchase for 60% of the public's shares in IDB Development at the end of 2015 and at the end of 2016, at prices of NIS 8.30 and NIS 8.70 per share, respectively. These prices reflect a 145-155% premium on the current share price.

IDB Development's most recent financial statements, published in late August, show that the company is far from financial stability, with a going concern warning still attached to the statements. The company's auditors draw shareholders' attention to several significant problems, including a NIS 335 million equity deficit, a decline in the size of the dividends distributed by its subsidiary companies, the need to regularize its financial criteria with the financing parties, etc.

Sale of Clal Insurance still casting a shadow

In addition to the challenging financial data, the current activity of some of IDB's businesses is far from optimal. The main thing troubling the investors is the question of the future of the company's holdings in Clal Insurance Enterprises Holdings Ltd. (TASE: CLIS), which constitute a controlling interest, although Clal Insurance is in the hands of Moshe Tery, the trustee appointed by Supervisor of the Capital Markets, Insurance, and Savings Salinger.

Earlier this year, the sale of Clal Insurance to a group of Chinese investors did not go through, following Salinger's refusal to approve the deal. Elzstain and Ben-Moshe expressed their desire to obtain control of Clal Insurance (meaning that the control rights would be restored to the IDB concern), and even submitted an official request to the Ministry of Finance. Salinger recently poured cold water on the idea, however, by making it clear that according to the information she had obtained to date, she was unlikely to approve the two men's control of the insurance group.

At the same time, Salinger announced that she would adhere to the timetable set in November 2013, under which Elzstain and Ben-Moshe must either obtain permission for control of Clal Insurance or sign an agreement to sell control of it to a third party by the end of the year. Otherwise, she will order Tery to sell IDB's controlling shares in Clal Insurance in any way he sees fit.

The market believes that if no new buyer is found for Clal Insurance by the end of the year (following which Salinger will also have to give approval within a particularly tense six-month period), Tery will sell IDB's controlling shares on the stock exchange. In this case, not only will IDB not receive a control premium (which was very generous in the unsuccessful deal with the Chinese), but it is likely that the jump in the supply of shares in Clal Insurance for sale will generate downward pressure on its share price, beyond what would happen to the share in normal circumstances.

Another worrying front is the Shufersal Ltd. (TASE:SAE) supermarket chain, which several months ago announced a streamlining plan that caused it to finish the first half of the year with a NIS 125 million loss. The plan is also expected to continuing having a negative impact on the company's financial results in the coming quarters.

Published by Globes [online], Israel business news - www.globes-online.com - on October 23, 2014

© Copyright of Globes Publisher Itonut (1983) Ltd. 2014

Moti Ben-Moshe and Eduardo Elsztain
Moti Ben-Moshe and Eduardo Elsztain
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