Extell bonds downgraded in Israel, but remain low risk

Both series of Extell Development’s bonds have been downgraded one notch by Israeli rating agency Midroog, bringing the rating from A2 to A3.

The bonds have been trading at yields above 11 percent since May, when financial reports revealed that the development firm had just $36 million in cash, reflecting investor concern over its ability to meet his bond payments, the bulk of which will come due in 2018 and 2019.

The lower rating reflects the softening luxury market in Manhattan, and the lackluster sales in key Extell projects, including the 92-unit One57 condo tower, according to the rating report. Mitigating factors include the successful financing of One Manhattan Square, completed in January, which substantially improved Extell’s liquidity.

Extell’s rating could fall further, the report warns, if Extell chief Gary Barnett fails to secure financing for the Central Park Tower development before the end of the year, which will trigger a put option from Shanghai Municipal Investment, a key investor in the project. SMI has already extended the deadline twice.

Company reports confirm that Barnett has signed a term sheet with JPMorgan Chase for a $900 million construction loan and should close on the financing before the end of the year. Extell’s reports also state that the company has enough liquidity to cover construction costs in the short term but not through 2018.

Overall however, while the short term shows some signs of risk, particularly if the Central Park Tower financing is not completed, the company has enough other projects at various stages of completion, with fairly low LTVs — that barring any further slowdowns — allow enough flexibility for a positive outlook.

While the rating maintains Extell’s low-risk rating, investors have previously expressed concern that the rating is not reflective of the true risk. Ziv Adato, head of investments at the Ayalim Fund, which owns more than $50 million in Extell bonds, said that the rating is not low enough.

“The bonds have been trading at double-digit yields for more than a year,” Adato said, which puts them at below investment grade. “The market predicted this a long time ago and priced the company’s bonds at a much lower rating than the one to which it was downgraded today.”

A spokesperson for Extell said in a statement that the rating is unsubstantiated, and that the company is meeting its objectives. “It is regrettable that Midroog succumbed to external pressure and lowered the rating just weeks before” the Central Park Tower financing is to be resolved.