IDB Holding Corp. Ltd. (TASE:IDBH) securities have fallen to a new low, reminding investors that no conglomerate is immune to risk, especially not a leveraged holding company, even if its portfolio contains ostensibly high quality assets.
IDB bonds, on which the company currently owes NIS 6 billion, have been sliding since the beginning of the year. Despite several measures by the company, controlled by chairman Nochi Dankner, to strengthen its financial position and toensure that it will meet its payments to bondholders (including equity issues, negotiations for the sale of Mashav Initiation and Development Ltd. to the Livnat family, the merger of Discount Investment Corporation (TASE: DISI) and its subsidiary Koor Industries Ltd. (TASE:KOR), and financing agreements with Menorah Mivtachim Holdings Ltd. (TASE: MORA) and the Bereshit fund), the bondholders are not buying it. This is reflected in the junk yields at which IDB's short and medium-term bonds are currently traded - 35.5% for the Series C Bond, and 27% for the Series D bond.
"Not enough"
In late December 2011, when market worries about IDB's capital structure emerged, Excellence Investments Ltd. stated in an analysis, "Investment in bonds of IDB Holdings and IDB Development reflect high risk, based on the yields of the two companies' bonds and series of hurdles that the companies are likely to face. However, when the numbers are examined and the strength of the group is understood, an investment in the bonds should probably yield a capital gain."
If that is the case, why has the market reacted so strongly in the past five months? Does this express justified concerns, or is this investor panic? Excellence research and strategy department head Yaniv Hevron, who co-wrote the statement above, responds, "When we published the recommendation last December, the bonds were falling. Back then, too, this was a risky investment, and it is still a risky investment." He believes that IDB will get through 2012, unless there are problems in the sale of the shares in Mashav.
"Globes": What has changed in your recommendation since then?
Hevron: "At least two scenarios that should have helped have dropped off the agenda. Credit Suisse Group AG (NYSE: CS; SWX: CSGN; XETRA: CSGZ) has fallen 25%, and we find it hard to see it recovering anytime soon. This slide has apparently caused some investors to lose patience. The attempt to institute the IFRS 9 accounting standard has also been dropped, because writing off accumulated losses would prevent the distribution of new profits."
Hevron adds that the Clal Insurance Enterprises Holdings Ltd. (TASE: CLIS) sale scenario, which was supposed to inject capital into IDB Development has become more complicated. "The sale of IDB Development will not solve IDB Holding's cash flow problem in 2013, and the company will not be able to receive dividends because of IDB Development's negative balances. IDB Holding can only receive cash as a loan from IDB Development, additional support from its controlling shareholders, or a combination of the two."
Despite this, Hevron says that the recommendation is under review, adding, "It should be remembered that the group has a lot of cash, and can sell companies to create one-time cash flows. The problem is how to send this cash up through the corporate structure, and this problem is now more complicated and time is short."
Despite all the measures taken by IDB, investors are not pleased.
"The investors want to see more measures; it's not enough for them. Time is of the essence; there is less time and there are fewer scenarios. Investors are losing patience, because IDB has not yet been able to create certainty about its ability to repay from 2013 onward. Restoring investor confidence won't be easy now, and will require IDB to take more drastic steps to create certainty about its ability to repay in the long term."
Immediately classify IDB as high risk
Ayalon Investment House chief strategist Yaniv Pagot takes a sharper tone than Hevron, saying, "The bondholders' lack of confidence is liable send IDB Holding and IDB Development into a tailspin, as a self-fulfilling prophecy. This will make it harder to carry out the financial measures available to them in order to survive without a debt settlement, because everyone classifies them as companies in distress."
Pagot adds, "The worst of the European crisis is still ahead of us, and the continent's financial system is still far from a safe haven. We therefore do not pin any hopes on a meteoric rise in share prices of IDB Development's tradable portfolio in general, and in Credit Suisse's share price in particular.
"Investments in IDB Holding and IDB Development's bonds should immediately be classified as high-risk in investment portfolios, and should not be based on their high public debt rating. Such an investment does not suit a conservative investor, for whom this would like trying to catch a falling knife," Pagot says.
For whom is the investment suitable?
Pagot: "It is especially suited to risk-taking investors as a small percentage of their speculative investment portfolios. This is because if we eulogize the group prematurely, the profit potential is enormous. We're talking about an extraordinary potential profit in both the bonds and shares."
IDB Holding's share price fell 0.8% in morning trading today to NIS 23.30, giving a market cap of NIS 1 billion.
Published by Globes [online], Israel business news - www.globes-online.com - on May 8, 2012
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