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The Game of Dominos: Nochi Dankner on the Ropes. Down But Not Quite Yet Out

/ By Clive Minchom /
IDB Holding Corp’s bondholders seem to be joining forces with the bondholders of its subsidiary IDB Development. The distinction is important as IDB Development is the operating entity that holds the assets of the company and IDB Holding is a top holding company, owning only shares in its subsidiaries, that had been the vehicle for loans originally put in place for Dankner and his partners to take control of the company in the first place.

In taking this joint action both sets of bondholders now seem to be finally turning turned their back on Nochi Dankner, and are withdrawing from an outline arrangement previously formulated with Argentinian businessman Eduardo Elsztain.

The obvious implication is that Dankner will now lose control of IDB and the bondholders will take it over themselves. After ten years of effective divide and rule with his approach to investing Nochi Dankner, may now finally have been out-manouevred; one should be careful not to under-estimate his powers of defence, however, and until the game is over it is not over…

Leverage is a simple game really; it is all about confidence and then you borrow some money in your private company, or sometimes two of them, to buy a business and pledge the shares against the loans.

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Next you bring in a couple of partners with you into these private shells to share the risk but who are content to leave you with day to day control, so it costs you less.

Then you issue bonds with subordinated security, or no security, to provide money for expansion.

Then you pass these funds down to the business you just bought as additional equity and and use it as the basis for issuing bonds there to make more acquisitions.

Then you milk the operating companies for dividends to flow money back upstream to pay for it all.

If you bought well and nothing goes wrong then a few years later your equity base has grown, you can pay the borrowings back and everybody thinks you are a hero.

The trouble with leverage though is that what looks like a virtuous circle on the upside can turn around and bite you very fast once the businesses you own are no longer able to support what can easily become an addiction to borrowed money: including from partner banks all of whom are happy to grant you credit apparently without restraint. Maybe the businesses you bought face more competition, e.g. Cellcom. Maybe they now need investment in rejuvenating assets which you have neglected to make – e.g. Shufersal. Maybe major share positions were taken in companies that in the end didn’t turn out so well – e.g. Credit Suisse. Maybe at the top you yourself also borrowed foolishly to build a casino – e.g. land in Las Vegas.

Whatever the reason, once it turns on you and the first domino falls, things can go down-hill pretty quickly from there as reduced, or sometimes even negative cash-flows can no longer support your debt payments. Now instead of reaching an amicable settlement with banks and bond-holders, things then go from bad to worse when your creditors unite against you: once they start talking to each other they can figure out for themselves that maybe they can do the job better than you can. Then, that magic called confidence vanishes and the conversation can turn pretty ugly pretty fast.

There is however still room for legitimate debate: asset value can presently be negative, for example, but liquidity remain strong for a projected defined period of time still to come. Nochi Dankner’s case is that this is so and that it gives him time to fix the business and the actions of the bond holders are therefore way premature. The view of the bond-holders is that is just special pleading- what else do you expect him to say they will say.

That is all what is happening to Nochi Dankner right now, and it is now out in the open for us all to watch with the same fascination that one can experience at a bull-fight as the bull gores the matador. Whether Nochi Dankner is the bull or the matador remains to be seen, but statistically I am told that neither tend to live to a ripe old age. And now it looks increasingly likely it will be up to a judge to decide, unless he pulls a juicy looking rabbit out of the hat at the last moment that confounds all his critics. This is the Middle East after all so one never quite knows for sure…..



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