ISRAEL CORPORATION LIMITED This is an English convenience translation of the original Hebrew version. In case of any discrepancy, the binding version is the Hebrew original.
Israel Corporation Ltd.
Registrar Number: 520028010
Securities of the Corporation are listed in the Tel Aviv Stock Exchange Short name: Israel Corporation
Address: P.O.B. 20456, Tel Aviv 61204
Tel: 03-6844517, 6844500, Fax: 03-6844587 Email: MAYAAK@ISRAELCORP.COM
Form 121 Public
Date of Transmission: January 27, 2016
Reference: 2016-01-018391
To: The Securities Authority | To: The Tel Aviv Stock Exchange |
www.isa.gov.il | www.tase.co.il |
Immediate Report
The Event: Maalot's Report
Attached is Maalot's report - affirmation of 'ilA+' rating and revision of rating outlook to negative due to increase in the LTV ratio and decrease in the margin on the financial covenant vis-à-vis some of the lenders.
The date when the event first became known to the corporation: January 26, 2016 Time: 18:00
The name of the authorized signatory to the report and the name of the authorized electronic signatory: Maya Alcheh-Kaplan
Position: Vice President, General Counsel and Company Secretary Date of signing: January 27, 2016
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January 26, 2016
Primary Credit Analyst
Matan Benjamin, 972-3-7539731 matan.benjamin@standardandpoors.com
Secondary Credit Analyst
Alice Kedem, 972-3-7539739 alice.kedem@standardandpoors.com
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Summary Rating Action Rationale Outlook
Related Criteria And Research
Please note that this translation was made for the company's use only and under no circumstances obligates Standard & Poor's Maalot. In the case of any discrepancy with the official Hebrew version published on January 26, 2016, the Hebrew version shall apply.
Research Update January 26, 2016 | 1
Research Update 'ilA+' Rating Affirmed; Outlook Revised To Negative On Increase In LTV Ratio, Decrease In Margin On Financial Covenant Vis-à-Vis Some Of Its Lenders SummaryFollowing a drop of about 14% in the value of the company's investment portfolio since our last rating action, its LTV (loan to value) ratio is currently about 43%, compared to about 36% in November 2015. The current LTV ratio, which we consider an indicative metric of the company's leverage, now exceeds the ratio we previously identified as commensurate with the current rating (below 40%).
We assess that the company's debt coverage ratio could weaken if deterioration occurs in the operating performance of Israel Chemicals Ltd. ("ICL") beyond the assessment in our base-case operating scenario, against the backdrop of negative trends in financial markets in general and in commodity markets in particular.
Due to high market volatility and the downward trend in ICL's market capitalization, the company may violate a financial covenant vis-à-vis some of its lenders.
We affirm Israel Corporation Ltd.'s 'ilA+' rating and revise its outlook to negative from stable.
The negative outlook reflects the risk that the company's operating performance deteriorate beyond our previous expectations, causing coverage ratios to exceed the ones we see as commensurate with the current rating, i.e. a debt to EBITDA ratio below 3.5x and an LTV ratio below 40%, as well as the risk that the company violate a financial covenant vis-à-vis some of its lenders.
Rating ActionOn January 26, 2016, Standard & Poor's affirmed its 'ilA+' rating on operating holding company Israel Corporation Ltd., and at the same time revised the outlook to negative from stable.
RationaleThe outlook revision to negative reflects the fact that the company's LTV ratio now exceeds the ratio we see as commensurate with the current rating, the risk that the company violate a financial covenant vis-à-vis some of its lenders, and the risk that the company's coverage ratios deteriorate, against the backdrop of negative trends in financial markets in general and in commodity markets in particular.
The value of the company's investment portfolio dropped by approximately 14% since our last rating action in November 2015, mainly due to a 19% drop in the market capitalization of subsidiary Israel Chemicals Ltd. ("ICL", BBB/Negative/ilAA/Stable). Following this drop in portfolio value, the company's LTV ratio is currently about 43%, compared to about 36% at the time of our last rating action. The current LTV ratio exceeds the ratio we see as commensurate with the current rating, LTV below 40%. We note that following the completion of a strategic spin-off by the
company of its holdings in early 2015, we have changed our methodological approach and now assess Israel Corporation's credit risks mainly through the examination of the debt coverage ratios that arise from its consolidated statements, while examining the company's LTV ratio as an indicative metric for assessing its leverage and refinancing capabilities. ICL's results are fully consolidated into Israel Corporation's financial statements, while Oil Refineries Ltd. ("Bazan", ilBBB+/Stable) is an affiliated company and its results are listed using the equity method in the affiliated companies income section.
In the base-case operating scenario in our rating update for the company published on November 23, 2015, we noted that we expect challenging conditions in the Potash market. We estimated that ICL's average selling price of potash could decline by about 10% to $280 per ton in 2016-2017, due to the ongoing supply-demand imbalance. We also estimated that, given a return to normal operation and capacity after the strike in Israeli production facilities in 2015, ICL's operating results would improve in 2016. On January 4, 2016, ICL reported signing framework agreements with customers in China to supply up to 3.4 million metric tons of potash over the next three years. The potash price for the Chinese market, an "anchor price" which largely sets supply prices in the entire potash industry, will be determined in the upcoming months in negotiations between suppliers and Chinese customers. Uncertainty in potash prices has grown, in our opinion, on the backdrop of negative trends in financial markets in general and in the commodity market in particular, and growing concerns regarding emerging market economies, especially Chinese economy, including currency depreciations that further reduces farmers' purchasing power. However, at this stage we do not find it necessary to update our base-case operating scenario, and we continue to estimate that Israel Corporation's debt to EBITDA ratio will be about 2.5x-3.0x in 2016, lower than 3.5x which is the threshold we identified as commensurate with the current rating. The negative outlook reflects the risk of deterioration in the company's debt coverage ratio if ICL's operating performance deteriorates beyond our base-case operating scenario assumptions.
Israel Corporation is currently committed to a single financial covenant vis-à-vis some of its bank lenders: net liabilities/ICL and Bazan share value (according to the agreed-upon cap on Bazan share price) of up to 60%. At the moment, this ratio is at about 49%. We believe that, due to market volatility and the downward trend in ICL's share price, about 19% since November 2015 and about 45% since the beginning of 2015, there is a larger risk that Israel Corporation violate this covenant. Such violation would be sufficient grounds for lenders to demand immediate repayment of the relevant debt.
Liquidity
Our assessment of Israel Corporation's liquidity, reflecting the analysis at the holding company level, is "adequate" according to our criteria, underpinned by material cash balances and dividend receipts from Israel Chemicals Ltd. We estimate that the ratio between the company's liquidity sources and uses will exceed 1.2x in the upcoming year. In addition, about 35% of ICL shares owned by Israel Corporation and all its Bazan shares are unencumbered, providing additional financial flexibility.
In our base case scenario we estimate that the company's liquidity sources as of January 1, 2016, are:
Cash and tradable financial assets of about $557 million;
Dividend receipts from subsidiaries at about $150 million-$160 million until year end 2016;
Tax rebate of about $160 million.
ICL – Israel Corporation Limited issued this content on 27 January 2016 and is solely responsible for the information contained herein. Distributed by Public, unedited and unaltered, on 09 February 2016 11:45:16 UTC
Original Document: http://phx.corporate-ir.net/external.file?t=2&item=o8hHt16027g9XhJTr8+weNRYaV9bFc2rMd0Q/AXw4ztgbSvNlVBrRglSBe5jbWeJ+amut/GMvBAvs/KHFbmx6yLDSsCuO6Q1oNQxPmgzk0oRbG6uivGTGWfuiy3nrf8AGtOVm9eAPksAazpeQdf/Pw==&cb=635906145562689131
