The terms of the arrangement, as part of the recovery plan for Israel Corp. subsidiary Zim Integrated Shipping Services, have been published.
One of the biggest and most complicated debt arrangements in Israel's history will be put to the test on November 1, at the Israel Corporation shareholders' assembly. The company, controlled by Sami and Idan Ofer, published the terms of the arrangement Sunday evening, as part of the recovery plan for Israel Corp. subsidiary Zim Integrated Shipping Services.
The arrangement is with the creditors of over 95% of the company's debt, and the plan is aimed at covering Zim's anticipated $1 billion operating deficit from mid-2009 until 2013.
Under the arrangement, Israel Corp. shareholders will contribute $450 million to covering Zim's deficit, while the bondholders and other unsecured creditors will provide $211 million.
The updated debt arrangement agreement - drafted during marathon talks with representatives of the bondholders, foreign banks and shipyard and ship owners - significantly improves the position of the bondholders at the expense of the Israel Corp.'s shareholders and the foreign banks, which agreed to further concessions.
Under the arrangement, the redemption date for three bond series will be postponed from 2012-2015 to October 2016, provided that Zim's ratio of consolidated debt to Ebitda is under three. If not, the repayment of the bond debt will be further postponed until 2017-2020, depending on the debt ratio in the second quarter of each of these years. If the payment is in 2020, it will be in a lump sum in October of that year.
In exchange for their agreement to postpone the repayment of the bonds, Zim bondholders will be compensated thusly: the Israel Corp. will commit to a cash infusion of $75 million and private companies owned by the Ofer family will inject a further $25 million if Zim is in financial straits and unable to make payments to bondholders; is on the verge of temporary or permanent liquidation or of receiving a going concern warning from the accountants; or needs to renegotiate its debt.
These guarantees will increase the Israel Corp.'s investment in Zim to $525 million, including a new cash infusion of $250 million and the conversion of $200 million in shareholder loan to share capital, and a $75 million guarantee. The Israel Corp. will also provide a $50 million safety net of cash reserves.
Foreign banks, which loaned Zim $420 million for the construction of 12 ships, will lend Zim another $500 million to complete the building of the ships. This loan will come due in 10 years and will contribute significantly to Zim's financial strength.
In addition to the shareholders' commitment to Zim, the bondholders will receive an extra 1.2% interest per year on any bond repayment installment that is delayed. Thus the interest on the series B1 bonds could reach 10.4% in 2016, up from the original 5.4% indicated on the bond.
Zim will be able to reduce the financial burden of this additional interest by providing securities for the repayment of the debt to bondholders. If, for example, Zim provides securities worth at least $100 million, the supplementary interest will be 0.75% per year, and will shrink to 0.4% per year if at least $150 million in securities are provided. These terms give Zim an incentive for providing the bondholders with guarantees.
In any event, Zim has committed to providing bondholders and unsecured creditors with at least $59 million in guarantees in 2012 and 2013. Zim will also give bondholders a negative lien, meaning that the company will not be allowed to give any other entity a lien on one of its existing assets, as that would be to the bondholders' detriment.
The company will also present bondholders with any transactions involving substantial shareholders, for the bondholders' approval.
Zim further committed to paying bondholders and other unsecured creditors 12.5% of the company's operational surplus each year. This is a higher percentage than their relative share of Zim's debt, and this payment is a further incentive for the company to repay its debt faster.
At any point in time Zim will have the right to repay its debt to bondholders, but will have to compensate them for the period until the original redemption date.
The bondholders will receive an option to convert 35% of the unpaid balance of the principal and interest on the bonds to Zim shares when Zim issues stock to the public or when the controlling stake in the company is transferred. The conversion price will be at a discount of 15% from the value at which the company issues stock or transfers the controlling stake.
The bondholders will also receive an option, which can be exercised by the end of 2020, for an allocation of 12.5% of Zim's share capital at a company valuation of $700 million.
"We gave the bondholders an attractive offer," said Zim CFO Alon Raveh, "based on the principle that the debt will be repaid in full, but will be rescheduled for a period of three to seven years. We created a system of delicate balances between the groups [of creditors] in order to preserve the order in which the company's debt is repaid."
"This is an excellent arrangement that preserves the bondholders' rights," says Avraham Well, the lawyer representing the Zim bondholders. "The arrangement is based on the rescheduling of the debt, not its erasure, in exchange for higher interest of up to 5%, the provision of $50 million-$150 million in guarantees, up to 12.5% in options from Zim and the option to convert one-third of the debt into shares. The arrangement will be conditional on the infusion of $600 million to the company, restrictions on dividends to the owners during the arrangement period and the bondholders' approval of any deals by substantial shareholders."