The relative quiet in which the negotiations between shipping company Zim, controlled by Israel Corp., and its bondholders have been conducted was disturbed at the end of last week. The body representing the bondholders sent a sharply worded letter to the company, informing it that it rejected the ultimatum that had been presented for deciding whether to accept Zim’s offer of a debt settlement. The ultimatum was set for today. “We entirely reject the ultimatum you presented to the members of the representative body whereby your proposal, which does not meet the representative body’s demands, is a matter of ‘take it or leave it’, and we are to respond to it by 14:00 on Sunday,” the letter said. The representative body comprises Migdal, Amitim (the old pension funds), and Harel. A source close to the representative body added that “Israel Corporation’s behavior is questionable. You don’t present an ultimatum to hundreds of thousands of fund members. It seems that they forgot themselves.”
Zim tried to calm matters at the weekend, and claiming that it had not presented the bondholders with an ultimatum. “The timetable for an arrangement was presented to the representative body as to every other entity with which Zim has conducted negotiations in the past few months. The proposal that the bondholders’ representatives received from Zim was very much improved in comparison with the terms offered previously. Besides, Zim will not conduct negotiations with the bondholders’ representative body through the media.”
Zim is on the final straight on the way to a rescheduling of debt totaling $3.5 billion. The company is in difficulties because of the crisis in the shipping industry and because of its aggressive ship procurement program, to finance which it took on debt which is now a heavy burden. Zim’s own forecasts project a negative cash flow of some $1 billion up to 2013. It has many creditors, among them overseas banks, shipyards, and ship leasing companies, with most of which it has reached debt rescheduling agreements.
In 205-2006, Zim raised some $350 million though three series of bond offerings to investment institutions. No-one imagined that, within four years, the company would be asking for a debt arrangement, and that the A rating that the bonds received when they were issued would give way to a CC rating, only four levels above insolvency.
The bondholders came to the negotiations with Zim in a position of inferiority. The amount the company owed them was small in comparison with the debts to other creditors, representing only about 10% of the debt in the arrangement. They have no collateral, and Zim began to negotiate with them only after it had reached agreement on the outline of the settlement with most of its creditors.
Zim’s initial proposal took into account the weakness of the bondholders’ position. Zim asked them to defer debt payments for four years, so that redemption would begin only in 2016, and that only if the company had managed to reduce its debt to other creditors.
It is no wonder that the proposal angered the bondholders. What they found particularly objectionable was the fact that, although the shipping companies controlled by the Ofer family were waiving debts of $150 million owed to them by Zim, they were receiving notes convertible to Zim shares at that value in 2016. A situation was thus liable to arise in which the Ofer family would gain control of Zim, while the bondholders would be left with the mere hope of getting their money back.
The bondholders’ disquiet made Israel Corp. improve its proposal. Under the new proposal, the capital note was cancelled, and it was stipulated that the $150 million debt owed by Zim to the Ofer family would be subordinate to the debt to the bondholders and would start to be repaid only in 2016, at the same schedule as the redemption of the bonds (pari passu).
However, even this concession has not satisfied the bondholders. They argue that the arrangement offered to them does not include collateral, or adequate compensation in the form of interest or Zim shares. “In the arrangement proposed to us, we can only hope for the best, that all the optimistic projections, which incidentally only go as far as 2013 and do not reach the period in which the bonds are supposed to be repaid, will be realized, and then we will get the money back,” said one bondholder.
The bondholders are also demanding that the Ofer family should forgive a larger amount of debt (Zim still owes the family companies some $400 million) than the current waiver of $150 million.
In response to the institutions’ claims about the arrangement proposed to them, at Zim they say, “The proposal does not diminish the debt to the bondholders; it only defers the repayment date. The contribution of the parties at interest to improving the bond terms is far reaching. It should be pointed out that both the shipyards and other shipowners have lent themselves to the company’s recovery, on the clear understanding that continuation of its activity is the right solution.”
Although the bondholders are ina n inferior position vis-à-vis the other creditors, they do have an effective weapon with which to threaten Israel Corp., namely a petition to the court for a winding up. Although, if Zim is liquidated, the bondholders are liable not to see their money at the end of the process, as far as they are concerned, in the present situation, the risk of that is similar to the risk they face under the offered settlement, whereby they may see some of the money in 2016. On the other hand, the Ofer family has a great deal to lose from a liquidation. In a liquidation, the family’s private shipping companies will be low in the order of creditors, after the bondholders, since they will be considered suppliers and not debt holders.
Israel Corp. demanded a response from the bondholders by this afternoon, because in the next few days it has to complete the debt arrangement with the various creditors. This Wednesday, Israel Corp.’s shareholders are due to approve an injection of $350 million into Zim, a critical condition for the arrangement.
At least three days before the shareholders meet, Zim is supposed to present to them the arrangement with all the creditors and a comprehensive plan. As things stand, the chances of putting together an arrangement with the bondholders by tomorrow look slim.
Published by Globes [online], Israel business news - www.globes.co.il - on October 11, 2009
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