The upheavals that hit the financial markets in recent weeks increase the negative pressure on the corporate debt market in Tel Aviv. Within a period of about three months, the volume of the bonds of companies trading at a double-digit yield jumped by 37% to almost 2NIS 5 billion, which leads to fear of a credit crunch and increasing difficulties in raising and circulating debts by the public companies.
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The not-so-honorable club of companies whose bonds they issued are trading at a “junk” yield, which for some time now includes Haim Katzman’s yielding real estate companies G City and Norstar and the construction startup company Hanan Mor, was recently joined by Discount Investments (DSKSH ), against a background of rapid erosion in the value of its holdings traded on the stock exchange, alongside a challenging debt payment situation for the coming years.
These returns show an increase in the level of risk that investors attribute to the company, in a way that blocks its access to debt circulation in the market. DSKSH’s three series of bonds totaling NIS 2.2 billion are currently trading at yields of 12-14%. In the absence of the possibility of revolving the debt, the company will be required to find other ways to raise the funds required to meet its obligations.
The value of the property and building holdings was cut in half
DSKSH is a holding company that operates without a controlling owner. A little over two years ago, a group of investors led by Tzachi Nahmias’ Mega Or yielding real estate company won a tender to purchase the controlling shares in the company (82%) from the IDB receivers, after increasing On the competing offer of the former controlling owner of DSKSH and the collapsed IDB Group, Eduardo Elstein.
The buyers of the controlling shares are considered to be the “star” group of the business sector, which includes, as mentioned, Nahmias’ Mega Or and alongside it the Zelkind brothers’ Elko holding company (each holding about 30% of DSKSH shares), the retail and aviation tycoon Rami Levy (11% of the shares), and the businessman Chen Lamdan (5%).
In exchange for the controlling shares, the members of the group paid a total of NIS 1.1 billion, in what now appears to be a particularly failed investment that reflects a loss of more than 50% on paper. DSKSH, managed by Nathalie Mash’an Zakai, trades at a market value of only NIS 636 million, after the company’s stock was cut by about 60% in the past year.
Facing the threatening bond debt, DSKSH mainly holds the controlling shares (63%) in the property and building company that controls the yielding real estate company Gav Yam, as well as the control in the telecommunications company Cellcom (36%). Alongside them, it also holds control in the agricultural produce company and the lands in Mehdrin and in the technology holding company Elron Ventures.
As mentioned, the investors are also concerned about the rapid erosion in the value of DSKSH’s assets in recent months, which is affected by the falls in the stock markets along with the interest rate increases. The value of DSKSH’s controlling shares in the property and building fell in the last half year by 45%, and the value of the holding currently stands at NIS 764 million, about half campaign at the end of the third quarter last year.
Towards the end of last February, Properties and Building reported the end of the negotiations for the sale of the HSBC Tower in New York that it had planned to carry out, without an agreement being reached. The value of that office tower, one of the company’s key assets, gradually eroded and dropped from $855 million at the end of 2021 to $720 million at the end of the third quarter last year.
The value of Cellcom shares held by DSK has also eroded in recent months to NIS 795 million, a drop of almost 30% compared to the value of the holding at the end of the third quarter. Last January, Globes reported that DSK hired the services of Barclays Bank in order to restart the process of selling control in Cellcom, after failing to do so last summer. In any case, DSK estimates that the value at which Cellcom is currently traded (NIS 2.1 billion) is far from reflecting its economic value.
Bond debt of NIS 677 million due this year
As of the end of the third quarter of 2022, DSK’s gross debt amounted to NIS 2.9 billion. At the same time, its liquidity balances stood at approximately NIS 1.1 billion, as it presents a challenging disposal schedule for the coming years. In 2023, the company is scheduled to pay off debt to bondholders A total of 677 million shekels, a year later another 650 million shekels, and in 2025 she is required to pay another 623 million shekels.
It seems that the heavy burden of debt burdening DSKSH, and the rapid erosion of the market value of its tradable holdings, are reducing the company’s business maneuverability. The realization of the assets, which was supposed to ease the debt burden, has also become more difficult and complex in view of the situation in the markets, which creates pressure on The prices of the bonds issued by the company.
At the end of the third quarter of last year, the value of DSK’s marketable holdings was NIS 3.1 billion. However, since then those holdings have been cut by almost a third, and their value is currently less than NIS 2 billion. Hence, the company’s net asset value (NAV), which at the end of last September stood at NIS 1.2 billion, dropped significantly and currently stands at only about NIS 200 million.
Another indicator that may change for the worse due to the deterioration in DSK’s financial situation is its debt rating. Today, the company’s liabilities are rated BBB by S&P Maalot, while in the latest update report from May 2022 their rating horizon was defined as “stable”, and it remains so as well At the same time, the same update states that a negative scenario that could lead to a downgrade includes a worsening of the company’s liquidity, or limited accessibility to the capital market and the banking system.
Those close to the company, which is expected to publish its financial results for 2022 in the coming days, estimate that despite the declines in the markets, it has enough liquid sources to make it through the coming year, with the hope that during this period there will be a recovery in the value of its tradable holdings.
A jump in bond index yields on the stock exchange
Beyond the situation of DSKSH, the overall picture of the corporate debt market on the stock exchange has, as mentioned, become rather bleak recently. The balance of corporate debt traded in Tel Aviv currently stands at NIS 394 billion, in 761 different bond series. Of this, the financial scope of the bonds that trade at a double-digit yield is about NIS 25 billion, so it is 6.3% of the total marketable debt. The number of bond series that trade at a double-digit yield is 86 (11% of the total series).
What explains the sharp increase in the volume of junk bonds in the last three months is mainly the increase in interest rates, which burdens leveraged companies and makes it difficult for debt cycles. The increase in interest rates in many countries in the past year led to a series of upheavals and collapses of banks in the last two weeks, the first of which was the collapse of Silicon Valley Bank in the USA a week and a half ago, alongside the rescue of the Swiss Credit Suisse bank which was sold in the last day to the competitor UBS.
The trend of rising corporate bond yields is reflected in the various Tel-Bond indices on the stock exchange, which include the relevant bonds according to various criteria. The Tel-Bond 20 index, which includes the 20 largest bond series, most of which are linked to the Consumer Price Index, is currently traded at an implied yield to maturity which approaches 3% – a jump compared to the beginning of last February, on the eve of the upheavals, when the yield stood at 2.2%.
A similar trend affects the Tel Bond Shekel index, which includes non-indexed bonds, whose implied yield stands at 6.2%. Although this was already close to 6.5% at the end of February, it still jumped sharply from a level of just under 5% at the beginning of the month past.