Public losing money, again, as gas kingpin Yitzhak Tshuva teeters on abyss

The Israeli public, already reeling from record unemployment as a result of coronavirus, is taking an additional, more indirect hit from losses by the private monopoly that controls the country’s natural gas.

For the past five years, the partnership of Yitzhak Tshuva’s Delek Group and the Texas-based Noble Energy has maintained a stranglehold on the Israeli taxpayer.

This follows the government’s agreement in 2015, via the so-called gas framework, to a deal that locked the Israel Electric Company into paying Delek and Noble prices for gas from the Tamar reservoir that rise every year while globally, energy prices have been plummeting.

And it has been compounded by the companies agreement with the state to delay payment into a special sovereign wealth fund, intended to recoup part of the industry’s profits for the public’s good. Not a dime has been paid yet for the Tamar field, which started production in 2013. The giant Leviathan field only began commercial pumping at the start of this year.

Last year, Yitzhak Tshuva took a huge gamble by having Delek Group sell off most of its non-energy related subsidiaries to focus on oil and gas. Last spring, he ignored warnings that he was getting too big for his boots when he raised $1.72 billion dollars to buy North Sea oilfields from market giant Chevron. Leveraged up to the eyeballs, he is now falling victim to plummeting oil and gas prices brought on by a price war between Russia and Saudi Arabia and the the near global COVID-19 lockdown, which is seeing huge drops in energy demand.

Delek Group, exactly a third of which (33.78%) is owned by the public, is teetering on the brink of collapse. The value of the company has gone down by 66 percent since the beginning of the year to NIS 3.5 billion ($960 million), the business newspaper Calcalist reported Tuesday. It owes its investors more than NIS 6 billion ($1.65 billion) and the banks around NIS 2.6 billion ($715 million) — sums which it is not expected to be able to repay.

Reflecting the lack of market confidence, one Israeli credit agency — Maalot — has put the group onto its observation list because of doubts about its ability to finance debt repayments on time and raise additional credit. Another agency, Midroog, has lowered Delek Group bonds to junk status, saying that the expectation that it will default on its bonds “rests on our assessment that the company’s liquidity and financial flexibility will worsen significantly as a result of the global economic and financial crisis that has been taking shape in recent weeks, following the spread of the coronavirus.”

With Delek Group weakening by the day, some foreign banks are already calling in their loans. Citibank was the first to do so, on a $57 million loan.

Institutional investors, who are responsible for managing the public’s pensions, have been trying to offload stocks as quickly as possible. Furthermore, according to The Times of Israel’s Hebrew-language sister site, Zman Yisrael, bondholders have begun to organize to try to get their money back.

Will Delek Drilling survive?

Delek Drilling, 54% of which is owned by the Delek Group, is the subsidiary that is directly involved in Israel’s Tamar and Leviathan reservoirs, along with Noble Energy Mediterranean Ltd.

Delek Drilling is still in a much better position than its controlling shareholder.

Nevertheless, reflecting its own losses, and dealing an additional blow to Delek Group, the subsidiary revealed in its 2019 annual financial report, published Monday, that despite recent promises to the contrary, it will not be paying any dividends. Delek Group was expecting a payment of NIS 621 million  ($170.5 million) this year.

With dismal predictions for the coronavirus period ahead, Delek Drilling’s director’s report warned that the company may not be able to repay the $2.6 billion it owes the banks and its bondholders by the end of this year and that it is likely to default in a way that will prompt lenders to demand repayment immediately.

Customers have been getting in touch, it said, saying that the virus is a “force majeure” (a claim denied by Delek Drilling) that is likely to affect their own ability to pay for supplies in line with agreements signed.

On a practical level, the report says that coronavirus could lead to significant delays in gas production, in planned maintenance work at the Tamar platform and in a ramping up of production at Leviathan.

This, it explains, is because of the need for foreign experts from the various equipment companies whose movement their own governments may limit or whose entrance to Israel may be prohibited locally, as well as the possibility that its platform workers could fall ill.

Will Israel’s gas keep flowing?

Natural gas is regarded as an interim energy source on the way to renewables, even though Israeli environmental groups want a much quicker transition than the government is willing to enact.

In the near future, barring unforeseen, apocalyptic conditions, the gas will keep flowing, whether Delek Group and Delek Drilling are in charge of the pumps or not.

There’s enough gas to keep the country going from the Tamar reservoir, the Israel Electric Company’s much cheaper purchases of liquefied natural gas (LNG) and, eventually, the Karish and Tanin wells (with different owners), whose development the current crisis might well delay.

Writing in the investigative news website The Seventh Eye (in Hebrew), Yoni Sappir, head of Home Guardians, which has been fighting the Leviathan platform located close to Israel’s northern shore, said that these three sources can provide 24 billion cubic meters of natural gas annually, which is more than twice what the current economy needs.

Furthermore, if Delek Group falls, and even Noble Energy Mediterranean Ltd (parent company Noble Energy, based in Texas, has seen its value plummeting during the current crisis and was hardly having a stellar performance before that) the way will theoretically be open to renegotiate and lower the price of gas with a consequent positive knock on effect on the cost of living in Israel.

When the deal was made, the government agreed with the monopoly’s argument that its rising price tariff somehow reflected the risks it had taken in exploration. Those risks are now history and the reservoirs are functioning.

Will Israel’s banks save Tshuva, with the public footing the bill?

Tshuva will only be able to retain his hold on the group if he manages either to refinance his loans, deter their payment, or dig up and sell personal assets hiding beneath the radar.

If there’s a takeover, the new owner or owners are unlikely to shoulder all of Tshuva’s debt — after all, they will want to make a profit.

The big question, then, is whether Israel’s banks will step in to save him.

In 2011, for example, Bank Leumi wrote off 48% of a NIS 270 million debt owed by Tshuva as part of a debt restructuring deal.

Calls on the banks supervisor to intervene

Last week, two civil society groups wrote to the Bank of Israel’s supervisor of banks, Dr. Hedva Bar, demanding that she intervene immediately in the Tshuva debt situation and not “after the horse has bolted.”

Both Lobby 99, a crowdfunded lobbying nonprofit, and Financial Justice, said it was crucial to “prevent substantial and needless financial damage to the majority of pension holders in the country, who are already absorbing losses because of the corona crisis.” (More than 23% of Israeli workers are seeking unemployment benefits.)

Citibank’s speedy reaction to Delek Group’s financial situation “raises questions about the lack of response from the Israeli banks… which are also exposed to its high debt,” the letter went on.

“In the event that Tshuva will not be able to meet his obligations, we call on the banking supervisor to issue an unequivocal message to the banks not to reach a debt resettlement with Tshuva. For the good of the Israeli economy, which has been harmed again and again by Tshuva, steps towards bankruptcy must be taken rather than the extension of future capital.”

The two organizations called on Bar to examine whether loans have been extended to Tshuva according to regulations, whether real time reviews have been carried out of the bank’s obligations vis a vis the real value of the collateral, and whether Tshuva should be called upon to immediately repay his debts.

Referring to a cross-party Knesset commission of inquiry, which reported in April last year, the organizations said that they expected the commission’s recommendations to be implemented and that the era of “tycoon discounts” was over.

The commission, headed by then Labour MK Eitan Cabel, slammed what it called the “negligent” financial sector for “systematically” extending or writing off loans for the rich while pursuing small debtors to the “last cent.”

It was the public that was funding “free lunches for tycoons” while the banks sent repossessors after ordinary debtors.

The committee described the systematic way in which Israel’s banks cozy up to business tycoons by giving them outsized loans, writing off hundreds of millions of shekels’ worth of their debts, and then balancing their own books by charging their regular customers more for everyday financial services.

Over the years, the inquiry indicated, the banks’ untenable practices, and the failure to effectively regulate them, have cost the public billions of shekels. It also castigated the banks for doing everything in their power to hide information from the committee.

The committee found a “regulatory vacuum” with no sanctions and no deterrents for “severe negligence” in the granting of credit. Regulators, especially those supervising the banks, were being “held hostage” by the very bodies that they were supposed to supervise.

The parliamentary committee was set up in July 2017 in the wake of several high-profile cases involving business moguls sinking into massive debt, and then having significant proportions of those colossal debts written off.

Among other things, it probed how banks and other financial sector bodies such as pension and investment funds made decisions to grant large loans, what guarantees were demanded, what sanctions were implemented if loan conditions were broken, and how regulatory bodies enforced the rules to protect the stability of the financial system.

Delek’s response

Following the publication of Delek Drilling’s 2019 annual report, Delek Group issued a statement saying, “Delek Group is meeting all of its commitments and has a range of excellent assets in Israel and abroad that are expected to generate significant cash flows in 2020 and in the years to come, and to provide the group with maximum financial flexibility, according to its needs.”

The statement denied that Delek Drilling was not intending to issue dividends, saying the opposite was true. Delek Drilling, it said, had explicitly stated what cash balances it was expected to have each year, in line with cash flow assumptions and from which one could ascertain the dividend it intended to distribute.

“In all events, even if the claim about Delek Drilling not intending to distribute a dividend was true, and it is not, the group has other excellent assets that are expected to generate significant cash flows to repay its liabilities, including its holdings in Ithaca (in the North Sea), super royalties, super royalties from the Karish and Tanin project, its holdings in Delek Israel, and its real estate.

“The group is focusing at this time on just one thing: continuing operations to increase the liquidity and strengthen capital during the current period when global markets are in a continuing economic crisis, following the spread of the coronavirus and the decline in gas and oil prices.

“The Delek Group is a strong group, with excellent assets, and it will overcome the crisis successfully and emerge from it stronger.”