Extell’s Chinese JV Boosts Risk for Israeli Creditors, IBI Says

  • China’s SMI USA now has senior claim on assets backing bonds
  • Extell’s 2019 bonds fell most in 7 weeks after deal announced

Extell Development Co. just added another layer of risk for its Israeli bondholders in order to buy more time to find construction financing.

Extell announced a joint venture with China’s SMI USA to build its planned Central Park Tower project, a $3 billion skyscraper on Manhattan’s Billionaires’ Row. The deal comes with a deadline: If a construction loan isn’t obtained by May 24, SMI can require Extell to buy out its stake in the partnership -- about $300 million -- with interest. And if Extell fails to do that, SMI can push the developer to sell the entire project, according to documents filed last week on the Tel Aviv Stock Exchange, where Extell sells debt to investors.

Extell gave its Chinese partner a third layer of protection. If SMI is unable to sell the property with no more than a 20 percent discount, it can foreclose on the Extell unit that issued bonds in Israel -- allowing SMI to jump in front of Israeli creditors and lay claim to the assets backing their bonds.

‘Big Problem’

It’s a remote possibility, but it’s a risk that didn’t exist before the Chinese joint venture, Yaniv Saylan, a real estate analyst with Israel Brokerage & Investments, wrote in a report Monday.

“At the end of the day, another layer of uncertainty and risk was put into these bonds,” Saylan said by phone from Tel Aviv. “If it secures financing, the deal is perfect and everything is alright. If it doesn’t secure financing, we have a big problem.”

Extell’s President Gary Barnett confirmed that his Extell Ltd. subsidiary is guaranteeing the obligation to repay SMI if he doesn’t get construction financing by May 2017 and SMI opts to be repaid this way.

“It’s not going to come to that,” he said by phone. “We don’t anticipate any trouble getting the financing given that we are now looking for a very conservative amount of construction financing and we have a very good partner.”

Barnett said Extell will seek a construction loan of 25 percent to 30 percent of the value of Central Park Tower. Saylan has estimated the financing need at more than $1 billion.

Bonds Fall

Extell’s 4.65 percent bonds due in 2019 tumbled to 86 agorot on the shekel Monday to yield 10.4 percent in Tel Aviv today, the biggest drop in nearly two months. Its 6 percent bonds due in 2021 fell to 83 agorot to yield 11 percent.

The New York-based company has borrowed 1.65 billion shekels ($434 million) in the Israeli debt market since 2014, according to data compiled by Bloomberg. The bonds began to weaken after the company disclosed to the Tel Aviv Stock Exchange in March that it was forming a joint venture for three New York projects with Scott Rechler’s RXR Realty LLC.

Investors are also waiting to hear whether Extell has secured a construction loan for another condo project downtown, One Manhattan Square, Saylan said. The deadline for getting that loan -- which is a condition of closing the financing deal with RXR -- has been extended since June.