The Israeli bonds of Hertz Investment Group, a major office landlord across the U.S., were downgraded over concerns about the firm’s liquidity and a default at a Baltimore office building.
The Israeli bond rating agency Midroog downgraded the bonds — which are backed by about a third of Hertz’s portfolio — two classes from A3 to Baa2, according to a report on the Tel Aviv Stock Exchange.
The downgrades caused the yield on the bonds to shoot up 50 basis points to 6.3 percent.
The ratings agency also noted a continued default of a loan tied to Hertz’s Wells Fargo Tower in Baltimore.
“The situation creates ongoing uncertainty regarding the company’s liquidity and may create a ‘rolling snowball’ in the form of several consecutive violations of financial covenants,” the ratings agency wrote in a report.
Hertz initially turned to the Israeli bond market in 2017 to raise about $160 million backed by around 25 properties across the U.S. The bond market allowed Hertz to raise cheap financing for its portfolio. But now the bonds are trading at about half of par value, reflecting the increased risk of default perceived by investors.
In a statement, Hertz CEO Zev Hertz said, “The Midroog report was published in anticipation of what ‘could’ happen in light of macro and company-specific risks.”
He adds, “We continue to explore and evaluate options including refinancing some of our properties and have been successful in doing so.”
The LA-based firm, founded by the late Judah Hertz, bought trophy office towers in secondary cities such as Indianapolis, Fort Worth and Jacksonville, and is among the largest office owners in Downtown New Orleans.
But the firm has been set back by the office sector’s challenges, including the rise of remote work. Hertz sold a few properties, including the Pier One office tower in Fort Worth, at a loss, while others, such as its 435,000-square-foot tower in Downtown Milwaukee, faced foreclosure.
Judah Hertz died of ALS in February 2021, leaving his son Zev, who led a janitorial company, in charge.
Several longtime Hertz executives have since left the firm, notably chief financial officer Robert Licht and chief investment officer James Ingram. Earlier departures included Hertz’s president, Gary Horwitz, general counsel John Forbess and CFO James Kasim.
Zev Hertz said that the company has hired an interim CFO and that Ingram left more than a year ago.
“Note that people need to move forward with their lives and often there are other factors to consider,” he said of the departures.
Despite the office market’s headwinds, Hertz has managed to hang on to some of its more valuable assets. It received an extension on a $98.2 million loan from JPMorgan backing its 1.5-million-square-foot office complex in Pittsburgh. It secured $65 million in financing for its office campus in northwest Houston through a bond sale on the Tel Aviv Stock Exchange last year.
The firm also secured a $93 million settlement from Zurich American Insurance Company after Hurricane Laura damaged the tallest office building in Lake Charles, Louisiana.
Hertz and Zurich had been in heated litigation over the insurance claims. Hertz previously disclosed to investors that if it did not receive the payouts, it would “jeopardize Hertz’s cash flows and financial position and impede Hertz’s ability to tap the bond market for liquidity.”
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The settlement funds will be used to mitigate “the negative impact of the decrease in the value of the company’s assets,” according to the ratings report.
Hertz is among many U.S. companies that tapped into the Israeli bond market for cheap financing. Most notably, Brooklyn-based All Year Holdings used Israeli bond financing for its William Vale hotel and Denizen rental complex in Bushwick. When the pandemic hit, All Year faced foreclosures, and bondholders forced restructuring officers to take control of the company.