Urbancorp Bonds Plunge In Value………In Israel?

This story gets weirder and weirder.

Unless you get the daily news……from Israel, you might have heard about this, nor would you otherwise in the coming days.

But the story out of Israel, from the Haaretz Daily, is that almost $50 Million in Urbancorp bonds, which are traded on the Tel Aviv Stock Exchange, have plummeted in value to “junk bond” status.

I wasn’t going to continue writing about Urbancorp, but this is something that needs to be read…

PaperBonds

I mean it, folks: I didn’t set out to write about Urbancorp, again.

I’m not beating a dead horse.

But the news keeps coming out, and it’s getting crazier and crazier.

The story about TARION potentially revoking Urbancorp’s registration was just the beginning.

This story out of Israel shows you just how bad things were, and how bad they’re about to get.

You can read the full story HERE.

But if you’re not an online subscriber to the Haaretz Daily (seriously, who isn’t?), then you can only read the intro to the piece.

So here’s the story, in full:

 


 

$47.6 Million at Risk In Israel As Urbancorp Bonds Plunge Amid Doubts By Investors
Haaretz Daily Newspaper
April 4, 2016

Yields soar on TASE-traded debt as Toronto property developer loses lawyers, key director.

Urbancorp, one of 15 foreign real estate companies with bonds trading on the Tel Aviv Stock Exchange, was struggling with multiple crises Monday, jeopardizing some 180 million shekels ($47.6 million) in bonds held by Israeli investors.

Trading in the Toronto property developer’s bonds was suspended on Sunday before Urbancorp’s local attorneys took the unusual step of severing its contract with the company Monday. James Somerville said he was quitting the board of directors, just two weeks after he had been appointed to provide expertise in accounting.

Urbancorp’s bonds, which were issued only last December with a coupon of 8.15%, plunged Monday to 45 agorot, boosting their yield to a junk-bond level of 53%.

One of Toronto’s biggest property companies, Urbancorp is one of 15 North American property companies in the last two years to issue a combined 10 billion shekels in debt on the TASE.

Although the 8.15% coupon on Urbancorp’s bond signaled the risk of holding the debt, the bond attracted many of Israel’s leading institutional investors, including Psagot, Ayalon, Analyst, Migdal and Meitav Dash as well as private and small investors.

On Sunday, Urbancorp said in a lengthy announcement that its attorneys, Shimonov & Company, were severing their relationship with the company — a move the market saw as signaling a crisis of confidence in the firm.

Urbancorp has yet to release its 2015 financial report after its audit committee voted to delay it due to “open issues and questions,” including a valuation of a geothermal-heating project it controls. But the most critical issue facing the company is a C$12 million ($9.2 million) capital injection, Urbancorp’s controlling shareholder Alan Sakin had committed to when the company issued its prospectus last November head of the bond sale.

However, at the end of March it emerged that Sakin had taken out a loan from a non-bank financial group with considerable restrictions attached to it to make good on his commitment. The restrictions were not reported to Israel investors in a timely way and it is not yet clear whether the capital fulfils Saskin’s commitment.

Meanwhile, Canada’s Tarion Warranty Corporation, which provides a warranty on new homes from registered builders, said it would no longer issue insurance for deposits from buyers of Urbancorp properties.

Tarion said it had concerns about Urbancorp’s financial health and the numbers of claims from buyers being made against the company.

Claims have been filed against Urbancorp over delayed projects, deposit refunds and new homes in which the builder didn’t fulfil the contract with the homeowner.

 


 

This is just insane.

Those of you in the financial world – I need you to weigh in here.

Is there anything odd about a Toronto-based developer selling bonds on the Tel Aviv Stock Exchange?  I know we’re a “globe” as opposed to planet these days, and global companies have financial interests in many different countries.

But the fact that Urbancorp raised capital in Israel tells me that it was because they could no longer do so here in Canada.

Somebody told me in passing a while back that Urbancorp owes “tens of millions” of dollars to CIBC, and that they can’t get a dime from a lender in Canada.

So is that what happened here?  They turned to Israel?

These guys are finished, no question about it.  TARION is the least of their worries.

Two sentences in that article jump out at me:

1) James Somerville said he was quitting the board of directors, just two weeks after he had been appointed to provide expertise in accounting.

2) Urbancorp said in a lengthy announcement that its attorneys, Shimonov & Company, were severing their relationship with the company

Okay, so the person appointed to look over the books saw what was in them, got scared, and left.

And the lawyers representing the firm have left as well.

I feel like we’re just at the start of this story, and we’re going to look back on this in a year and say, “We had no idea where it was going.”

Does anybody else see a massive question mark surrounding their financing of projects?

Think about it – the Kings Club condo that was “cancelled” last year was done so by returning the deposits to the original buyers, with the minimum interest allowed (probably 0.75%), so Urbancorp might have essentially “borrowed” that money from would-be buyers, instead of borrowing money at 6-8% from commercial lenders.

Their current bonds have a coupon of 8.15%?

Something doesn’t add up.

Wait, a lot of things don’t add up.

But I think I’m finished with this story, unless we uncover more news.

There’s a lot more going on in the Toronto real estate market today.  I think on Friday, we’ll take a look at “exclusive listings,” since people keep emailing me about it…

13 Comments

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  1. Darcy W says:

    Not sure I agree with the title, but here’s a post on Urban Corp.
    The Canary In Canada’s Real Estate Mine Just Died: Toronto’s Urbancorp Files For Bankruptcy:
    http://www.zerohedge.com/news/2016-04-23/canary-canadas-real-estate-mine-just-died-torontos-urbancorp-files-bankruptcy

  2. AF says:

    Their bonds on the Tel Aviv exchange were trading around par after coming to market in Dec, plunged into the 45% range ..have recovered some. Their issue was 8.15% coupon, maturity = 31DEC2019, ILS 180.583 million (~ USD 47 million at the time). Coupon also just got stepped up by 50 bps yesterday now to 8.65% after ratings downgrade. First coupon date = Jun 30/16.

    http://www.tase.co.il/Eng/General/Company/Pages/companyMainData.aspx?CompanyId=001656&ShareID=01137041&subDataType=1

  3. Brandon says:

    If urbancorp is smart. They would file for banruptcy protection now. Then transfer all their land assets to a NewCO. This way all shareholders and debt will be wiped out. While the bond holders should be able to survive in the new company. Trust me this isn’t the end for urbancorp. They will rise again with a new name. Watch out David!

  4. McBloggert says:

    Interesting BNN has an article on this as well and seem to imply that that the $10M-$12M that Saskin was to inject as part of the bond offering, came from a non financial institution, which then received a significant chunk of the bond offering…now that doesn’t sound like a ponzi scheme at all…

    I have no doubt that the Saskins are personally well protected and won’t be going down w/the ship.

    Shady stuff!

    http://www.bnn.ca/News/2016/4/6/Urbancorps-financial-issues-unnerve-investors-in-Israel.aspx

    1. condodweller says:

      This sounds like the corporate equivalent of people paying credit cards debts with credit cards. It’s not going to end well. Naturally, it’s going to be the purchasers that lose out if they indeed did not get their deposits back.

  5. tony says:

    @ Boris

    Boris – Not trying to argue with you here. I was stating that it is not irregular for real estate firms to take advantage of favourable rates, regardless of where they are found.

    I’m not trying to defend Urbancorp in any way and will not comment as to their legitimacy / business practices, merely purely for the financing perspective.

    Happy hunting

  6. Kyle says:

    I’ll preface by saying i am not the least bit familiar with Israel’s capital markets, but here are some semi-legit reasons they may have went to Israel:

    1. Size – $38.3M is peanuts, issuing a bond for that amount is like taking out a line out of credit to buy a pack of gum. The fees would hardly cover the cost of the transaction.

    2. A company needs credit ratings to issue bonds in Canada, Urbancorp did not have one prior to them seeking funding in Nov. Not sure how it works in Tel Aviv, but it typically isn’t a couple weeks turn around time.

    What i find more interesting though is the choice to issue a bond at all. Many Developers who seek financing for a specific project turn to syndicated mortgages. My guess is the funding Urbancorp was seeking was not for a project, but probably for operating costs or something else. Also puzzling is that Saskin himself had to seek alternative lending to come up with a measley $12M. Most successful Developers have the equivalent of that just in cars in their garages. And lastly i find it a bit concerning that there *seems* to be some correlation between the company’s financial health and their ability to return deposits (which are supposed to be held in Trust by a Lawyer not by the Developer).

  7. daniel says:

    I have some insiders who know some of the Saskins and some of the executives at UrbanCorp. From my understanding, Urbancorp went wrong because of various issues. However, the financial issues are mainly because (rumoured) the leadership team there decided to keep buying more and more property with more and more debt. They are now in over their eyeballs in debts that they cant even develop with more help from partners.

    Also, it is rumoured that the Saskins are personally full of cash. This will be interesting to see what happens.

  8. tony says:

    http://www.haaretz.com/israel-news/business/real-estate/1.663953

    It is basically cheaper for foreign firms (real estate) to raise debt from Isreali investors due to favourable returns vs their comparable domestic market. Pretty simple really, I don’t think there is any foul play here, just Urbancorp taking advantage of lower offshore rates.

    1. Boris says:

      As I said, disclosure requirements are low in Israel, and the absolute amount of capital raising has been minimal. $1B in credit raising from ALL foreign parties is a grain of sand on a beach.

      You don’t think there is any foul play here? Get your head out of the sand. The rats are scurrying off the ship. The bonds are priced at 55 this morning. What don’t you understand about that? They are pricing default. Give your head a hard rap and yell “McFly” for me.

  9. I like Logic says:

    “But the fact that Urbancorp raised capital in Israel tells me that it was because they could no longer do so here in Canada.”

    Great use of logic David.

    Another possible explanation is that it might be particularly convoluted and more expensive for these property developers to raise money in public markets here in Canada. Please don’t quote on me on this as this is not my particular market, but it *might* be a reason.

    I am leaning more towards your premise. It was probably impossible for them to raise money here aside from secured loans from the big banks.

    1. Boris says:

      The only reason it would be ‘convoluted and more expensive to raise money in Canadian public markets’ would be a scenario that is replete with of real problems. The problems could be that of reporting, financial controls, operational practices, pending legal action or debt burden. (Stickler alert: high yield bond markets are typically OTC, not public markets). It’s not particularly difficult for a sizeable Canadian developer to raise via bank loan or OTC high yield note in Canada. The cost of capital maybe have been lower if it was possible to list in Canada vs Israel, but the real issue was likely due not specifically to cost of capital but inability to raise capital period due to the factors I mentioned before.

      It’s that simple.

  10. Boris says:

    I can answer the financial stuff. Sometimes companies borrow in other jurisdictions for various reasons. Is it common for developers? sometimes. Is it common to borrow through the bond market period for a developer in a foreign jurisdiction? No. There are lots of Israeli ties in the Toronto development scene. Elie Dadoush of Firm Capital, the Menkes family etc. So that country tie is not unique. But it is bizarre for them to borrow in foreign bond markets, and I would concur that it sounds like something you do after traditional lending sources (corporate loans etc) dry up. Also, cockroach theory. There is never one, or two. Those being the legal resignation and the director. It’s likely an embezzlement scheme which has left the company capital constrained. Your comments on the cost of financing is accurate and clearly they were desperate, ie they didn’t have deposits at some point that they were required to return.

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