The Real Deal New York

Gary Barnett facing rising backlash in Israel over $75M payout

Two board members resigned in protest, bondholders sued, and ISA investigated
By Chava Gourarie | March 22, 2018 08:00AM

Gary Barnett and the Tel Aviv Stock Exchange

Gary Barnett is facing rising acrimony in Tel Aviv over a $75 million shareholder dividend that his company announced last week. Peeved bondholders claim the dividend is an undeserved payday for the Extell Development TRData LogoTINY chief, who countered that it was justified since he’s covered significant expenses out of his own pocket.

The brouhaha started on March 12 when Barnett announced that he sold $107 million worth of preferred shares in the $4 billion Central Park Tower condominium development, and separately that a $75 million dividend would be paid to the sole shareholder of the company — himself. Extell told bondholders that the dividend would be used to cover the company’s tax liability, “which the controlling shareholder has paid out of his own pocket.”

Two Extell board members resigned in protest, and things quickly escalated: Extell’s bonds plummeted, bondholders sued for access to the company’s documents, and the rating agency Midroog downgraded the developer’s bonds.

The two independent board members who resigned, Yahali Shefi and David Baruch, protested that the dividend was financially irresponsible, according to sources with direct knowledge of their thinking.

Barnett only stoked the flames when he responded during an investor call that, “one of them didn’t understand anything and Baruch was paranoid,” a source told The Real Deal.

The resignations alarmed bondholders, who have repeatedly expressed concern about Barnett’s ability to repay his debt, and they sued for access to Extell’s documents regarding the dividend, including correspondence, financial documents, and details regarding Extell’s development projects.

In the complaint, the bondholders list their concerns, and conclude that recent events support the suspicion that Barnett “is not acting in the benefit of the company or its creditors, but only for his own benefit.”

Barnett dismissed the claim as illogical.

“There’s an enormous store of value in this company,” he told TRD. “And for anyone to think that I would potentially jeopardize that, and not repay the bonds, is ridiculous.”

Despite the fact that Extell is indeed meeting its bond covenants, the bondholders have long been concerned about the level of liquidity, and so the payout feels especially unwise, an investment executive familiar with Extell’s finances said. Barnett has raised 1.65 billion Shekel, which translates to roughly $480 million, in two rounds of bonds, of which about $136 million will come due at the end of the year.

All of this consternation over the dividend attracted the attention of the Israel Securities Authority, which has been making inquiries into Extell’s decision, according to documents filed on the Tel Aviv Stock Exchange. In particular, there is debate over whether Barnett was allowed to post the dividend in the first place. According to the terms of the bond, Extell must have $100 million in cash left over after paying a dividend, which is not the case according to the most recent financial report from the third quarter of 2017. Barnett said he based it on the year-end documents, which have not yet been released, but which put the company’s cash-on-hand at $116 million after the dividend.

According to TASE documents, Barnett met with the Israel Securities Authority on Wednesday, and the agency requested that he supply further documentation about the dividend. Extell posted a report to the Tel Aviv Stock Agency to clarify that the meeting on their own initiative, and that the ISA has made no demands.

Barnett said that the dividend was anticipated, and its purpose is to compensate for everything he’s put into the company. “I’m the owner of the company, I’ve been supporting it in every way,” he said, and “now that the opportunity to take a dividend is there, we got very substantial transactions done at the end of the year and early this year, so of course I’m going to take a dividend. It was always anticipated. It’s the normal course of business.”