The plan to strengthen the financial strength of a company Norstar which was published yesterday (Monday) in the afternoon, did wonders for the securities of the company, which controls the shopping center giant G City (formerly Gazit Globe). It turned out that the economic obituaries written in recent weeks about the group’s business were premature. The controlling owner of Norstar, Haim Katzman, showed that he still has cards left up his sleeve and succeeded, at least for the time being, in allaying the concerns of investors in the IPOs of both companies.
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The publication of the report had a dramatic effect: Norstar’s bonds soared at a double-digit rate, after already trading at junk yields that showed the market’s lack of confidence in the company’s debt repayment ability.
Only about two weeks ago, theSeries XI bonds with a yield to maturity of 67%. At the end of trading on the stock exchange on Monday, after the announcement of the plan, the bond yield dropped to less than 8%. The yield of Norstar Agag 12 , which stood at 40% last month, dropped to less than 15% following the announcement. At the same time, the bonds of the subsidiary G City, which are currently trading at a maximum yield of 12%, soared.
At the same time, the shares of Norstar and G City also jumped at a double-digit rate, completing an increase of about 40% from the low recorded in them about two weeks ago.
Katzman announced that he would inject about NIS 90 million into the company
Norstar has published the first details of a plan, which includes capital injection, early redemption of one of its two series of bonds, and an exchange purchase offer for the other series, where the new bonds it will issue to holders who wish to do so will be secured by a full lien on the shares of the subsidiary G City.
The first planned step is the injection of capital. Katzman, who owns about 28% of the shares, informed the company’s board of directors that he intends to participate in about NIS 90 million, in a move designed to strengthen the company’s capital. It is not yet clear which of the existing shareholders, beyond their number, will take part in the capital injection, in view of the heavy losses that the stock brought to them in the last year. The stakeholders who joined the company last year are Israel Canada of Barak Rosen and Assi Tuchmayer (owns 22% of the shares), Rami Levy and Itzik Sela (more than 5% each).
Using the money it will raise and the remaining liquidity in its coffers, Norstar is requesting an early redemption of the Series 11 bonds, which left NIS 328 million. At the same time, Norstar will issue a new series of bonds (13), to which shares of G City in its hands, Norstar’s main asset, will be attached. The holders of the 12th series bonds (a debt of NIS 365 million) will be offered to exchange (voluntarily) the bonds in their hands for bonds from the new series and cash, with the entire move expected to take place in the next two weeks.
The issuance of the new series of bonds intended to replace the 12th series is intended to increase the maturity period of the debt and thus facilitate Norstar’s cash flow in the next two years. Series 12 is traded with a maturity (average life) of two and a half years and is scheduled for repayment by the end of March 2028. Series 13 bonds will begin to be repaid from March 2025 and will end on the date of Series 12.
Norstar and G City recorded a negative return of about 35% in the past year
The sharp drop in Norstar’s bond yields shows Katzman’s success in calming the spirits of investors, at least for the time being. However, they are still trading at yields where the existing debt cannot be refinanced (except by exchanging bonds as mentioned). Investors’ concern is also evident in the approximately 35% negative return recorded by Norstar and G City shares in the past year, despite the recent increases.
The trigger for the latest wave of declines in Norstar’s and G City’s shares took place after Globes published in October the reference of IBI real estate analyst Nadav Berkovic to the huge bond debt borne by G City, as NIS 8 billion. “We are in a situation where there are large gaps between how the market prices the stock and between how the company presents the value of its assets in its financial statements, and even between how the bondholders price it,” said Berkovic.
He emphasized that the equity derived from the value of G City’s assets in the books reflects a very high upside in relation to its market value. The reason for this, according to Berkovic, is that the market does not believe in the company’s equity, and prices the value of its assets lower.
Even the publication of the company’s reports for the first nine months of the year did not calm investors’ fears about the level of leverage of G City, which operates as mentioned mainly in the management and purchase of open commercial centers around the world. This is when in some territories its activity is exposed to shocks (Brazil, Russia and Eastern Europe) resulting from the increase in interest rates, fluctuations in currency rates and geopolitical crises.
Adding fuel to the fire of panic was the decision of the company’s board of directors, led by Katzman, to distribute a dividend of 53 million shekels to the shareholders, and the parent company Norstar at the head of them, despite the heavy debts looming over G City.
A protest from some of G City’s institutional shareholders was not long in coming, and as a result, Norstar recently reported that “as long as G City refrains from distributing the current quarterly dividend in 2023, Norstar will work to ensure the company’s liquidity, among other things, by making capital issues.” The dividend from G City, in which Norstar holds 51% of the shares, has been the only source of the parent company’s debt payments until today.
The implementation plan was expanded to NIS 5.3 billion
If these events were not enough, about two weeks ago the Midrog company cut G City’s debt ratings by two notches and Norstar’s by three notches. Midrog explained this in the “weakening of G City’s financial profile”, which was affected by an increase in financial debt that clouds the operating flow and the coverage ratio.
In an attempt to reassure investors, G City reported in mid-December on the expansion of its implementation plan, which aims to reduce its leverage. This plan was announced for the first time towards the end of October 2022, and amounted to NIS 3.6 billion. In December, it was expanded to NIS 5.3 billion.
From this program, binding agreements for the sale of assets for one billion shekels have been signed to date, while negotiations are underway for additional assets amounting to 2.6 billion shekels. G City estimated that it will enter into agreements to sell most of them by the end of the first half of 2023 and at prices that will not be low in book value.
There are those in the market who believe today that the investors who sent the shares of Norstar and G City to sharp declines will price the two below their true value. A veteran activist familiar with the group said that “at the end of the day, even if you take G City’s concerns with its assets in Russia, which are not a large part of its operations, or the activity in Brazil with the fluctuating currency and the instability there, the company trades at a multiple of 0.4 on the capital. Value Its market today is 2.4 billion shekels, and the equity is 5.7 billion shekels. Assuming she sticks to her realization plan, it will turn out that the market is pricing even today, a crazy destruction of value in her assets.”