Court rejects Arazim debt accord at taxman's behest

Meir Gurvitz












Tel Aviv District Court Judge Eytan Orenstein gave the parties - Arazim's management, representatives of minority shareholders and the Tax Authority - 21 days to work out a new arrangement.

The court rejected Arazim's creditors arrangement yesterday, siding with Tax Authority claims that the taxman was being given a back seat to bondholders.

On Thursday, Tel Aviv District Court Judge Eytan Orenstein gave the parties - Arazim's management, representatives of minority shareholders and the Tax Authority - 21 days to work out a new arrangement.

The real estate company, controlled by Meir Gurvitz, had been trading at a market capitalization of NIS 1.1 billion in the summer of 2007, but the global real estate collapse hurt it badly. The company found itself unable to repay its debts, which totaled hundreds of millions of dollars.

Its market cap is currently NIS 37 million, and as of the end of September 2010, it was running a shareholders equity deficit of NIS 122 million. It has a going concern warning in its books and is rated D for default by S&P Maalot. Its bonds are trading deep in junk territory, with yields of 30% to 42%.

In 2010 Arazim had been supposed to pay NIS 60 million to holders of its short-term bonds. It was blocked from doing so following objections by holders of long-term debentures (B4 ), to whom it owes NIS 230 million. The company tried to reach an arrangement that would let it defer repayment in exchange for compensating bondholders, namely by giving them a lien on a six-building complex in Britain that was leased out to a food manufacturer. It was the only remaining Arazim property that hadn't been attached to creditors.

Arazim owes its creditors NIS 378 million.

Under the creditors' arrangement, Gurvitz was supposed to forgo NIS 15 million in pay and receive stock options convertible into Arazim shares. The company proposed paying NIS 250 million to bondholders (who were owed NIS 360 million in total ) and the Tax Authority within three months. The company left it up to the Tax Authority and the bondholders to split that sum.

Some of that money, NIS 140 million, was to come from a foreign bank that would receive liens to Arazim assets. The company also intended to tap its cash resources, which totaled NIS 127 million at the end of March.

But the Tax Authority claims that it is owed NIS 55.5 million and that other creditors are receiving priority treatment - namely, bondholders are getting liens on properties.

Minority shareholders owning 12% of Arazim's stock also objected, claiming the arrangement is an attempt to rob them while prioritizing shares owned by the controlling shareholder.

On Thursday the court accepted the Tax Authority's position. Orenstein ruled that the company can't prioritize the bondholders over the Tax Authority. As for the minority shareholders, he ruled that the company was entitled to prioritize other creditors since they were not being asked to forgo any money.