Israel's Delek Group Headed for a Debt Deal Amid Signs It Can’t Meet Payments
Delek Group, the giant energy holding firm controlled by
Israeli businessman Yitzhak Tshuva, may have no choice but to seek a debt
accord, it emerged from the company’s fourth-quarter financial report, issued
Sunday.
“Under current conditions, Delek will find it difficult to
meet all its obligations without rescheduling payments or a haircut. Time is a
critical component of the equation,” Liran Lublin, head of research at IBI
Investment House, said in a note that was published Monday.
Delek, whose interests include the Israeli natural gas
fields Leviathan and Tamar as well as North Sea oil assets controlled by its
Ithaca Energy subsidiary, is weighed down by 7.8 billion shekels ($2.2 billion)
it owes to bondholders and banks.
On Sunday, CEO Idan Wallace said Delek “is a strong company
with quality assets and a clear positive net asset value.”
But Delek’s auditors, the accounting firm Ernst & Young,
attached a “growing concern” warning to the company’s financial report, meaning
they have doubts about its ability to survive and meet its obligations.
Delek shares, which have seen their value tumble 74% since
the start of the year, fell by another 10% on Monday to close at 136.80 shekels
on the Tel Aviv Stock Exchange. Its bonds, which now yield between 40% and
280%, fell by as much as 9%.
When Ithaca agreed to buy North Sea assets from the U.S. oil
giant Chevron in a leveraged deal a year ago, then-CEO Asi Bartfeld said he was
looking at “growth opportunities” in energy exploration and production. But the
coronavirus pandemic has caused energy prices to crash to their lowest in
years, and prospects for recovery look poor.
Delek Group wrote off $200 million from the value of its
Ithaca holdings last year to $1.5 billion and is expected to write off another
$600 million in its first-quarter report – a total of $800 million, or about
half of what it paid Chevron for the North Sea assets.
Meanwhile, Delek must repay principal and interest on its
debt totaling 2.1 billion shekels by the end of 2020 and another 1.7 billion by
the end of 2021. The company had just 400 million shekels in cash on hand at
the end of April.
To help it make the payments it plans, among other things,
to raise some 1.5 billion shekels by selling royalty rights due it from Karish
and Tanin gas fields it sold to the Greek energy company Energean, royalty
rights from its share in the Leviathan field, its Delek Israel unit and real
estate. Delek is also counting on dividends from its Delek Drilling and Ithaca
units totaling 1 billion shekels by the end of 2021.
Even if the company succeeds in collecting the dividends and
completing the asset sales, by the end of 2021 it will have just 189 million
shekels in cash, according to its own forecasts.
Lublin of IBI Investment House, however, expressed concern
that Delek would not be able to raise all the cash it plans. He warned in his
note on Monday that Delek’s bank creditors are getting anxious and may try to
call in their loans early.
“The information provided by Delek in its [fourth-quarter]
report indicates that it in breach [of agreements] vis-a-vis all of its
creditors (five). Some of them have not yet taken steps, and one, Bank Leumi,
has threatened to seize collateral – a plan that has been blocked by a
temporary court order,” he noted.
The Tel Aviv District Court, which issued the injunction in
connection with 100 million shekels Delek owes Leumi, will holding a hearing
Tuesday morning on the issue. The bank wants to seize a 5.7% stake in Delek
Drilling, worth 300 million shekels. The bank claims that Delek had violated an
agreement to provide by April 30 to pledge an 11% stake in another unit, Delek
Israel, against debt.
“The fear that [creditors] will act on pledges is real. The
court injunction was issued before [Delek’s] annual report was published, and
the risk for Delek is that the court will now reconsider whether to extend the
order in the face of the ‘going concern’ warning. The seizure of shares by one
lender could have a domino effect, with other leading banks seeking to do the
same,” Lublin said.
Vis-a-vis bondholders, Delek also faces a growing threat.
Under the covenants that it signed with them, it cannot allow its shareholders’
equity to fall below 2.5 billion shekels for two consecutive quarters. The
figure was 4.1 billion shekels at the end of 2019, but the Ithaca write-down is
expected to reduce that to just 2 billion.
Delek has promised bondholders it will raise 400 million
shekels in capital but Lublin said it would not be enough. “We believe that
buying more time is an important step in the consolidated debt settlement, but
alone will not provide a solution,” he warned.
In addition, Lublin noted, bondholders demanded other
concessions that Delek hasn’t responded to, so the threat remains that they
will demand immediate repayment.
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