The implications of the upgrade as per the indenture: the bond's interest rate will automatically drop an annual 2% and Aison's financing costs will drop by NIS 130 million (about $37 million) up to the bond's maturity date.
Calcalist has learned that the rating upgrade stems from Arison's pledge of a depository trust for institutional creditors who hold NIS 500 million ($144 million) of Arison's bonds; however, institutional investors, among them major pension funds and provident funds which hold NIS 1.3 billion ($370 million) in the company's bonds, are poised to stymie the upgrade on the claim that the bonds are not worth an AA rating.
Arison Holdings' main asset is its 20% stake in Bank Hapoalim which constituted the bondholders' sole security.
Arison's bondholders are fuming at the absurdity that even the bank's capital notes – which take precedent in repayment over the shares upon which they have a lien – are rated A+ (by S&P Maalot). How then can Arison Holdings' bonds receive a higher rating from competing rating company Midroog?
On March 2007, Arison issues a private institutional bond series to raise NIS 1.3 billion. The series was rated AA by S&P Maalot and carried an annual interest rate of 4.9% with five repayment dates from 2014 to 2018. The institutional investors were savvy enough to add a restriction in the indenture according to which the interest rate will immediately be hiked in the event that the bond rating drops below AA.
Indeed, on February 2009, Maalot decided to downgrade the rating to AA-, among others as a result of Arison Holdings' eroding financial relations on the backdrop of forecasts claiming that the bank will withhold dividends in 2009-2010 due to the financial crises. Several months later, on May 2009, as a result of the downgrade of Bank Hapoalim's indentures, Maalot yet again downgraded the share to A+, which, as aforementioned, is Arison Holdings' key asset.
The second downgrading triggered the indenture's restrictive condition and the interest rate paid to the institutional investors leapt 2% to 6.9% or to an annual NIS 26 million. Naturally, the Arison Group was far from pleased at the affair and at one point considered placing the bond on the market to avoid the need to upgrade its rating which was becoming a liability to the company's financing costs.
However, in November, Arison came up with a creative solution: she handed over the bond rating to the competing credit rating company, Midroog, which tout de suite upgraded the bond to an equivalent rating to Maalot's AA-.
The switch generated harsh criticism from the capital market. Even S&P Maalot's chief at the time, Dorit Slinger, which usually avoided publicly expressing her opinions on Maalot's clients, said the move compromises transparency and is testimony to the company's corporate governance. Arison rejected claims that the switch aimed at a higher rating yet seven months later it is evident that it was well worth her while.
Midroog said in response, "We publish ratings on our website, regarding companies under obligation to publish. This is done according to rating company rules. Midroog does not publish information on private company ratings."
Arison Holding declined comment.
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