$150 million debt that their shipping company Zim Integrated Shipping Services owes to their privately held companies would not, repeat not, be converted into equity in seven years.
At the height of the battle raging between bondholders and the companies that owe them money, Sami and Idan Ofer took a big step toward appeasing their creditors. They agreed that the $150 million debt that their shipping company Zim Integrated Shipping Services owes to their privately held companies would not, repeat not, be converted into equity in seven years.
Moreover, they agreed that the debt would be inferior in status to that of Zim's debt to the bondholders. In other words, the bondholders get repaid first. The bondholders are owed $350 million.
The move is designed to appease the shareholders of Israel Corporation, and persuade them to support a debt arrangement between Israel Corporation and Zim. A previous attempt to gain their approval for a debt arrangement fell through.
Israel Corporation proposes to inject another $350 million into Zim. The bondholders to whom Zim owes $350 million would, under their concept, agree to wait four more years for their principal - they'd be repaid in 2016 instead of 2012. In exchange, they'd get higher interest, a right to share in Zim's profits, and a right to convert debt into shares of Zim, which has been suffering badly from the crisis in the global shipping industry.
The Ofer family owns 50% of Israel Corporation, which at this point owns Zim outright. That could have changed.
In August 2009, the private Ofer companies agreed to forgo $150 million in debt, or 24% of the payments they are due from Zim (for leasing it 16 ships), in exchange for capital notes. The notes were to have been convertible into Zim stock. Theoretically, if the Ofers' private companies had converted the debt into stock, they could have taken the controlling interest in Zim from Israel Corporation, which is what infuriated Israel's institutional investors.
But the summons to a shareholders meeting at Israel Corporation, scheduled for October 14, to approve the capital infusion indicates that the Ofers' private companies have agreed to forgo the right to convert the debt into Zim shares in 2016.
Conversion of the debt into shares would have diluted, first and foremost, Israel Corporation itself. It would have been bad for the Ofer family, also. However, it would have been a relief for Zim, which remains stuck with the debt, though it doesn't have to repay the Ofers until 2016, at the earliest.
Why would the Ofers forgo conversion of the debt to them into Zim shares? Primarily in order to appease the institutional investors, which had been claiming that the debt arrangement served mainly the Ofers. Simply, it gave their private companies a way to take over the controlling interest in Zim from the Israel Corporation.
In short, the Ofers have paved the way for Israel Corporation's shareholders to approve financial support for Zim, which in turn can then continue to pay for the ships it leased from the Ofers (and others).