Since entering the Israeli bond market in 2015, the Related Companies has been one of the blue-chip U.S. firms of the Tel Aviv Stock Exchange, largely immune to the swings other issuers have experienced.
But with just six months until its bonds are due to mature, questions are being raised about whether Related’s Tel Aviv subsidiary will survive the coronavirus crisis and prolonged economic uncertainty.
The bond-issuing entity, Related Commercial Portfolio, reported an operating capital deficit of $128 million at the end of 2019, according to an earnings report published Tuesday night in Tel Aviv. The deficit is mainly caused by an upcoming $207 million payment due Sept. 30, when Related’s bonds mature.
“Historically, the company has had positive cash flows from operations and access to sources of financing,” the report notes, laying out how Related hopes to solve the problem. “Management intends to recycle the Series A bonds by raising funds in the Israeli capital market, or through other potential alternatives such as refinancing at the asset level, the sale of individual assets, or taking on mezzanine debt.”
That might not be easy. In light of the coronavirus crisis, the deficit “raises significant doubts about the continued existence of the company as a going concern,” auditors with the Israeli division of Ernst & Young note in their report on Related Commercial. A decline in property values caused by coronavirus or disruption in capital markets could make it harder for Related to secure the financing.
Related Commercial Portfolio’s bond price tumbled nearly 20 percent the following morning in Tel Aviv, trading at just about 80 cents on the dollar.
Israeli business daily TheMarker, which first reported on these disclosures, called them an “earthquake in the debt market,” noting that Related Commercial is a company “of great financial strength” with $456 million in equity capital and an A+ credit rating. Israeli rating agency Maalot has since downgraded Related Commercial’s bonds to BBB.
Related calls these concerns a technicality. “The going concern opinion included in our financial statements exists as a technical matter due to the near-term maturity of Related Commercial Portfolio’s Series A bonds,” a spokesperson for Related Commercial Portfolio said. “Related Commercial Portfolio expects the bonds will be refinanced in the ordinary course.”
Related Commercial owns stakes in four residential and six commercial properties in New York City, New Jersey and Chicago, according to disclosures. These include the $650 million Bronx Terminal Market, the $351 million Abington House luxury rental tower near Hudson Yards, and a $132 million office condominium at Time Warner Center.