You can't say that Africa Israel's announcement
about defaulting on its debt was a surprise. But still, when Lev Leviev
addressed a press conference with a gloomy face and admitted he can't
return the money he borrowed, local capital markets were shocked.
One of the nation's most prominent businessmen,
once considered to be the richest person in Israel, has become the most
prominent victim of the violent crisis that hit the global economy.
Leviev is a classic self-made man from a small town who went from being
a modest diamond cutter to a mogul running a multibillion-dollar empire
of diamonds and real estate. But he is now one step away from complete
bankruptcy and losing control of his Africa Israel global real-estate
business - together with lost credibility and a stain on his good name.
In short, what destroyed Africa Israel is the same thing behind
the current severe recession: over-leveraging. Over the past five
years, Africa Israel took part in dozens of ambitious real-estate
projects in the United States
. They were also very
expansive, and the company made some serious investments in "hot"
markets just when the global real-estate bubble was reaching its peak.
But it seemed Leviev didn't care: financing was so easy to get and, in
Israel, institutional investors (the guys who manage your pension
money) had loads of spare cash to spend.
So all he had to do after reaching the limits of his bank's
credit lines was to address these investors - backed with glowing
reports and "independent evaluations" of his company's assets - and
recruit many more billions of shekels, without even needing proper
guarantees, except for his word of honor.
Indeed, Africa Israel's grim case is a good example
of the terrible damage caused by adopting the shameful accounting
practice known as IFRS (international financial reporting standards).
Under this new practice, the "good old" accounting principle of
conservatism has been abandoned, and companies are allowed to rewrite
values of assets using up-to-date evaluations.
For a global real-estate giant like Africa Israel, this
practice was used to upgrade the value of its books' assets by billions
of dollars and use it for raising more billions in debt and in IPOs,
such as the one by its subsidiary AFI Development in London
In 2004, Africa Israel's total debt, including
subsidiaries, was about NIS 6 billion. By late 2008, it was NIS 22.5b.
Moreover, most of the company's assets by the time markets started to
fall were only in the developing stage, especially in Russia. The ratio
between these kind of assets to mature ones that yield steady cash
inflows was getting risky. When real-estate prices started to fall,
Africa Israel found itself caught between the worse market in decades
in the US and a devastated market in Russia, where the economy had
almost ground to a halt.
When the seriousness of this collapse became clear last
September, anyone looking at Africa Israel's balance sheet should have
seen a default coming. The company tried to calm things down, declaring
it was "financially stable" and had been able to sell assets to inject
But even these actions, which provided some false support to
its stock, were seen by many as a sign of weakness. One of Africa
Israel's biggest problems was the shortage of income-producing
properties; the sale of its Israeli crown jewel, the mall in Ramat
Aviv, together with some other cash-bearing assets left it more
cash-flow naked than ever.
So now the banks, institutional creditors and private investors
are all trying to save something from the mess Leviev left them with.
It has been said that all these lenders share a common interest of
wanting to keep the company alive so that it can recover some of the
money it owes.
But Africa Israel's ability to do that even if it is kept alive
is very low. It doesn't have many more "live assets" left in its
pipeline; most of the ones it still had were already given to the banks
as collateral. That means its bondholders, to whom Africa Israel owes
some NIS 9b., have little chance of getting their money back.
This is what makes the whole affair more significant than just
another story about a business failure. It is clear that Africa Israel
is not alone. Many other companies, especially in the global
real-estate business, are facing the same problems Leviev has.
Fischman Group, Arazim, Azorim and lately even Zim, one of the
Ofer family's leading companies, are struggling to survive in an
environment of deteriorating business and huge debts. Many of them owe
substantial amounts to unsecured bondholders.
Those "bondholders" are none other than you and me, whose money
was involuntarily handed over to incompetent money managers of the
provident, pension and insurance funds. Now these same people who
invested our money so poorly are trying to make amends by fighting like
lions over each shekel they can squeeze out of Africa Israel and
One of the most curious questions is what's happening with
Leviev's privately held businesses, especially the diamond business.
When Leviev approached the capital market to raise money, he used his
reputation and personal financial status to promote his new business
ventures. So his creditors should now be very adamant and target some
of his personal money - just in case Africa Israel's assets don't
The institutional investors should make Africa Israel's case an
example for other companies with impending default announcements. If
they let the beleaguered players - including Leviev and his foreign and
local bank creditors - leave them in the lurch, we might soon witness a
wave of such defaults.
But insisting on getting what they deserve at almost any cost -
including confiscating Leviev's shares in Africa Israel, appointing a
different management team and going after his private assets - would
send a strong message to the business community and the public. And it
would set a new standard for a more reasonable and moral world for the
good days that will come when this painful crisis ends.