Delek Real Estate gets debt arrangement
Less than two months before it has to pay bondholders NIS 340 million, company's coffers still short of most of funds. To add to its problems, it now faces demands for NIS 1.4 billion write-down in UK, appointment of receiver for its holdings in Germany
Calcalist has learned that although yet to be discussed by the board of directors, the issue is slated for discussion in upcoming weeks.
The yield of Delek Real Estate's 25-Series bonds soared to 88% in the past several days as compared to only 31% last month, which reflects investors' deep concerns regarding the company's inability to meet its NIS 308 million ($90 million) principle and interest repayments due early September.
A week ahead of the maturity date, Delek Real Estate will be called upon to pay off NIS 31 million ($9 million) in interest to its 5-Series bondholders. Company cash box are nearly empty and presently it lacks the funds to meet its financial obligations.
On Sunday, Delek Real Estate announced that its creditors are demanding it acknowledges a draconian NIS 1.4 billion ($410 million) write-down of its British car park portfolio, thus increasing the interest rate on the loan received for the property.
In another report, Delek Real Estate announced that the creditor group of the company's Germen Mülheim property decided to realize their rights on the property and appointed a receiver on their behalf.
Delek Real Estate is racing against the clock to sell its fully controlled housing construction company, Elad Israel Residence Ltd. Delek Real Estate CEO Eran Meital recently informed the company's management that he is currently negotiating with two bodies; however, it is unknown whether these talks will result in a deal.
Nonetheless, if an agreement is indeed signed, its completion might take two to three months and payments resulting from such an agreement will not be made before the repayment of the company's bond obligations. It should be mentioned that the sell off of 25% of Elad Israel Residence to the holder of Delek Real Estat's controlling interest, Yitzhak Tshuva, for NIS 100 million ($29 million), has not been concluded.
Calcalist has learned that Meital was recently summoned to an urgent meeting with the representatives of a major investment house which holds over NIS 100 million ($29 million) worth of the company's 25-Series bonds. Meital was requested to explain the company's state of affairs and the solutions under consideration.
One of the possibilities discussed was the issuance of a new bond series, collateralized by subsidiary DGRE shares which are expected to be released from the bank lien; however, the success of such a move is doubtful.
The same bodies which met with Delek Real Estate management got the impression that Tshuva does not intend to pour additional funds into a rights issue as he has done in the past when he poured an aggregated NIS 300 million into the company's coffers.
"A debt arrangement in Delek Real Estate is only a matter of time", sources on the market estimated Sunday. The company, however, imparted that a debt arrangement was in no way discussed by any of its bodies although it is evident that the company will have to come up with a solution to the matter.
Institutional bodies who met with Meital told Calcalist that Meital told them in the meetings that he "did not know how much more funds Tshuva will pour into the company beyond the obligations set forth in the reports". They claim that it was this information that generated the panic regarding the company's bond obligations.
A senior source from one of the investment houses even claimed that "Meital has everyone panicking". Tshuva is obligated to pour NIS 45 million ($13.2 million) into the company this year and another NIS 75 million ($22 million) next year on the condition that there will be no debt restructuring.
A source close to Delek Real Estate noted in response to the surge in the company's bond yields that "one cannot expect a company with a 90% yield to be free of problems. Obviously the debt issue is being examined as well".
Delek Real Estate, as mentioned, denied any intention of reaching an arrangement or any decision on the matter at that; however, sources close to the Group said that the bonds will be replaced sans haircut, if at all. A source close to Delek Real Estate also said that "there is no doubt that yesterday's announcement puts the company in a difficult position".
According to estimates, replacing Delek Real Estate chairman Aharon Kacherginski with Roni Elroy was a move aiming first and foremost to enable the company to hold its ground vis-à-vis its bondholders if it did decided to accept a debt arrangement.
Trouble in Britain as well
The company's downhill amble began at the end of 2005 when the company launched a highly leveraged acquisition campaign before the outbreak of the global financial crises and consequently found itself in recent years struggling to bridge its abysmal financing gaps.
On Sunday, as mentioned previously, the company received a letter from the lender of its England car-park portfolio funds, demanding the company write down the property's value from £913 million ($1,466 million) to only £656 million ($1,053 million), i.e. an approximately 30% write-down.
It is important to mention that only a few months ago Delek Real Estate performed a £52 million ($83 million) amortization on behalf of the property. Thus if the company is indeed forced to acknowledge the reevaluation demanded by its lender (£656 million), it will be looking at an approximately £310 million ($498 million) write-down within just a few months.
Delek Real Estate subsidiary DGRE holds 59% of the company's property portfolio. In the meantime, Delek Real Estate rejects the valuation suggested by the lender. If during negotiations with the lending bank the company fails to convince the latter that the property's value is higher, Delek Real Estate will have to consider writing off part of its investment and consequently incur a heavy loss.
To date, a downward reevaluation means adverse implications for Delek Real Estate as it increases the loan-to-value ratio. Therefore, the lending bank demands that the margin on the mezzanine loan interest, the book value of which is NIS 562 million ($165 million), shall be increased by more than twice its value. This means that the effective rate of interest will be 9% which means an annual £2 million ($3.20 million) expense increase in the books.
Delek Real Estate ended the first quarter with a capital deficit of some NIS 954 million ($280 million) and with NIS 2.8 million ($820,000) negative working capital. A downward reevaluation of the car-park property such as the lender demands would further affect its equity which might decrease by another NIS 130 million ($38 million) already in the company's Q2 reports.
And if that was not enough, National Car Park (NCP) which is leasing the company's car parks, has recently found itself grappling with liquidity problems and sent Delek Real Estate a request to cut its car parks rent. According to the letter to Delek Real Estate, NCP is requesting a reduction of £750 million ($1,205 million) per quarter, in total – a cut of approximately £3 million ($4.80 million).
Coffers expected to run dry
Concurrently with the developments in England, the company is hardly resting on its laurel leaves in Germany. The German lending group which funded the acquisition of the Mülheim property announced yesterday the appointment of a receiver in order to realize its rights on the property. This comes after the owner of the property DGRE failed to meet the due date for paying back its non-recourse loan and due to a €17.7 million ($25.25 million) downward reevaluation decided upon by the lenders.
By the end of Q1, the loan's balance for the property totaled about €21.3 million ($30.4 million) while at the same time, the property value in the books is some €25 million ($35.6 million). It may be assumed that in its upcoming reports, Delek Real Estate will register an overall loss of some NIS 9 million ($2.6 million) due the writing off of the property.
On the backdrop of its liquidity predicament, Delek Real Estate was required to add a cash flow forecast to its quarterly reports; however, the request for a downward reevaluation of its England car park holdings alongside NCP's request for a rent cut and an increase in financing costs as well as the writing off of its German property are expected to bear down on the company's already fragile cash flow.
In the next two years, Delek Real Estate will be required to meet its financial obligations towards its bondholders totaling some NIS 1.4 billion ($410 million), on top of a NIS 630 million ($185 million) bank debt and NIS 90 million on behalf of related parties. A considerable portion of the company's cash flow derives from its DGRE subsidiary from which Delek Real Estate expects some NIS 740 million ($217 million) this year (of which it had so far received some NIS 206 million) through dividends, a DGRE share buyback and a property sell off.
Even if the company meets all the milestones presented in its Q1 reports - including among others the sale of Elad Israel Residence, the sell off of additional property, the issuance of rights, collateral release and the procurement of new credit – Delek Real Estate coffers are expected to dry out by 2013, leaving the company with a mere NIS 6 million ($1.76 million).
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