Delek Real Estate Bond Rating Downgraded Amid Financial Distress

Credit rating agency S&P Maalot has downgraded Delek Real Estate's bond rating from A- to BBB and placed the company's ratings on a negative outlook watch. The downgrade follows the company's violation of financial covenants and a deterioration in its liquidity. Delek Real Estate, owned by American businessman Abraham Lesser, operates in the income-generating real estate sector in the U.S., focusing on offices, public buildings, and logistics, as well as residential properties in New York, Pennsylvania, and New Jersey. The company, one of the oldest BVI companies trading on the Tel Aviv Stock Exchange, has issued nine series of bonds since 2008, raising approximately 4 billion shekels. Currently, three series remain outstanding, with the company owing 1.16 billion shekels to their holders.

Delek Real Estate's ability to meet its obligations is in doubt due to difficulties stemming from the U.S. office market crisis and rising interest rates. These factors have increased its leverage, reduced asset values, led to accumulated losses, and complicated debt refinancing. The company faces significant upcoming payments, including 295 million shekels plus 52 million shekels in interest for series H in December, and 134 million shekels plus 40 million shekels in interest for series Z in June. However, as of early November, the company had only about 60 million shekels in cash reserves.

The rating downgrade comes after bond yields for Delek Real Estate had already surged to triple-digit levels months prior, reflecting investor concerns about the company's solvency. Series Z bonds, with 268 million shekels due in 2027 and 2028 and unsecured, are trading at a 126% yield. Series H bonds, due in December and secured by some company assets, are trading at a 28% yield, while unsecured series T bonds, with 600 million shekels due between 2028 and 2031, have a 63% yield.

S&P Maalot cited Delek Real Estate's leverage ratio reaching 77%, exceeding the covenant limit for series H bonds. Further covenant breaches, including minimum equity requirements and loan-to-value ratios, have already triggered penalty interest payments. The rating agency noted that Delek Real Estate plans to sell assets and secure additional loans to fund its bond redemptions, but these plans are contingent on factors beyond the company's control and could be delayed or canceled, as has happened with previous deals.

Last June, a dispute arose between holders of series H and series Z bonds regarding Delek Real Estate's intention to repay a portion of its obligations to series Z holders, which could have impacted the repayment capacity for series H bondholders facing a larger repayment in December. Ultimately, the company met its payment obligations to series Z holders.