IDB Development Bonds Slump Most in 3 Months as S&P Cuts Rating

IDB Development Corp.’s 2018 bonds dropped the most in three months after Standard & Poor’s Maalot lowered the Israeli investment company’s credit rating on concern it may struggle to pay debt. Government bonds fell.

The 4.5 percent notes maturing June 2018 slumped 2.7 percent, the biggest drop since Oct. 23, to 76.95 agorot on the shekel at the close in Tel Aviv. The 4.25 percent benchmark government bonds due in 2023 yielded 4.06 percent, up three basis points, or 0.03 percentage point, and taking the three-day gain to 10 basis points.

S&P cut IDB Development’s rating by three grades to ilB, five levels below investment grade, citing “weak” funding and unsustainable high leverage, according to a Jan. 17 statement to the Tel Aviv bourse. The company may fall 1 billion shekels ($268 million) short of cash to cover debt and costs in 2014, S&P said. The yield on IDB Development’s notes soared 13.5 percentage points last year.

“IDB maybe facing difficulties in getting the approvals necessary to sell assets as it seeks debt financing sources,” said Gil Chen, a bond trader at I.B.I.-Israel Brokerage & Investments Ltd. in Tel Aviv. “The negative environment is pushing down its bonds.”

IDB Development approached Koor Industries Ltd. to start talks to sell a full or partial stake in Clal Insurance Enterprises Holdings Ltd., Tel Aviv-based Koor said Jan. 17. IDB Development owns 55 percent of the insurer and a direct 13 percent stake in Koor, according to data compiled by Bloomberg.

‘Very Challenging’

IDB Development’s downgrade comes as its parent company, IDB Holding Corp., seeks funds to avoid defaulting on 2 billion shekels of debt after bondholders on Jan. 7 rejected a settlement proposal. IDB Holding shares slumped 2.8 percent to 10.33 shekels, the lowest level since Dec. 31.

“The intention of IDB to sell a stake in Clal is positive but the approval process will be very challenging and we see a risk to the execution of a deal,” S&P Maalot said.

The Tel Aviv Bond 40 Index, which measures inflation-linked and fixed-rate corporate bonds, declined for the first time in four days, falling 0.1 percent to 281.86. Israeli funds raised a net 464 million shekels in the week ended Jan. 17, down 53 percent from the week earlier, according to data of Meitav Investment House Ltd. Corporate-bond funds pulled in 431 million shekels, it said.

The two-year break-even rate, the yield difference between the inflation-linked bonds and fixed-rate government debt of similar maturity, rose less than one basis point to 210, implying an average annual inflation rate of 2.1 percent.

The shekel weakened 0.3 percent to 3.7288 a dollar on Jan. 18, trimming its monthly gain to 0.1 percent, according to data compiled by Bloomberg. One-year interest-rate swaps, an indicator of investor expectations for rates over the period, declined one basis point to 1.72 percent that day.

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