Israel's Elbit bond structured transactions axed due to price decline

By Marisa Wong

Madison, Wis., Feb. 11 - Elbit Imaging Ltd. said the financial institutions that had acquired its series A to G debentures under the structured transactions with Elbit Imaging Financing Services, LP announced on Aug. 2, 2012 and Nov. 8 notified Elbit Financing of the early termination of those transactions.

The termination resulted from the decline in the debentures' market price and, consequentially, the failure to meet loan-to-value covenants in the structured transactions, according to a Sunday news release.

The release said that the financial institutions were not obligated to hold the debentures purchased under the transactions but only to have those debentures delivered to Elbit Financing at the scheduled termination date upon redemption of the corresponding credit-linked notes.

Under the terms of the transactions, if early termination results from a decline in the debentures' market price, the financial institutions may sell the bonds.

The financial institutions may then use proceeds to redeem the respective credit-linked notes, either execute a cash settlement or physical settlement and deliver to Elbit Financing the proceeds of the debentures sale or the remainder of the bonds not sold, in excess of early termination amounts retained by the institutions.

The early termination amounts consist of the principal and interest under the credit-linked notes and unwind costs. The company said it expects that the sale of bonds held by the financial institutions will cover the termination amounts.

The amounts of cash or bonds to be returned to Elbit Financing will depend on the prices at which the bonds are sold.

Background

As previously reported by Prospect News, Elbit Financing purchased an Israeli shekel-denominated zero-coupon credit-linked note due Oct. 2, 2013 from a financial institution ("the counterparty") in August 2012 under a NIS 75 million bond structured transaction.

The credit-linked note references a portfolio of Elbit's bonds with a market value of NIS 75 million.

Elbit repurchased the bonds under a May 23, 2011 repurchase program and sold them to Elbit Financing, which then sold the portfolio to the counterparty. The counterparty paid the market value of the bond portfolio and issued the credit-linked note at an issue price of NIS 37.5 million.

During the term of the credit-linked note, the counterparty is to retain all of the proceeds derived from the bond portfolio. At maturity, it will deliver the remaining, unamortized portion of the bond portfolio to Elbit Financing.

In a Nov. 8 release, Elbit announced that Elbit Financing entered into a similar NIS 150 million bond structured transaction, under which the company was granted a NIS 75 million credit line for the purchase of a portfolio of its bonds having a total market value of up to NIS 150 million.

According to the two previous releases, the credit-linked note can be terminated early under certain circumstances, such as if the market value of the bond portfolio falls below a threshold level. If an early termination event occurs, the credit-linked note will be redeemed, and Elbit Financing will receive a cash settlement amount derived from the then-prevailing bid price of the bond portfolio.

In November the company also increased the bond repurchase program to allow the buyback of up to an additional NIS 125 million of Elbit's series A through G and series 1 notes.

Tel Aviv-based Elbit Imaging is a holding company with activities in the fields of commercial and entertainment centers, hotels, image-guided treatment, residential real estate and fashion retail.

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