Delek Group Ltd. (TASE: DLEKG) subsidiary Gadot Biochemical Industries Ltd. (TASE: GDBC) is one of the smaller companies in Yitzhak Tshuva's portfolio, but the companies financial trouble and burgeoning debt has forced him and his partner in the company, the Ofer family, to inject tens of millions of shekels into it. Delek Group owns 65.7% of Gadot, and Ofer-controlled Israel Corporation (TASE: ILCO) subsidiary Oil Refineries Ltd. (TASE:ORL) owns 23.5%.
Gadot Biochemical produces ingredients and fine chemicals for the food and beverage, cosmetics, detergents, and pharmaceutical industries. Problems with the company's new facility in China, whose set-up went over budget and is still not in full production, has resulted in liquidity problems. In addition, sugar prices for fructose production have soared, while margins on lemon acid - two of the company's main products - resulted in a cumulative loss of NIS 23 million in 2010 and the first quarter of 2011.
Gadot Biochemical's debt totals NIS 320 million: NIS 200 million in bonds, which now bear a yield of 19.6%; NIS 67.5 million in short-term bank loans; and $15 million to Harel Insurance Investments and Financial Services Ltd. (TASE: HARL), which in June 2010, provided a seven-year loan bearing 8.9% interest.
Gadot Biochemical has taken two measures to ease its financial situation: it rescheduled a $11 million loan to a Chinese bank, which was due to be repaid in June; and Harel eased the financial covenants on its loan in exchange for raising the interest rate by 50 basis points.
Gadot Biochemical's big test comes in November, when it will have to pay bondholders NIS 55 million. According to the company's projected cash flow report, published in May, it can meet its liabilities through the end of the year with owners' loans or a $15 million rights issue, and by raising $20 million in a new bond. The last option seems improbable, in view of the current bond's low rating and high yield.
Gadot Biochemical's heavy expenditures this year are partly because it still has to support its Chinese subsidiary; it estimates that $7.5 million will need to be injected into these operations through the end of this year.
Tshuva and the Ofers have twice injected capital into Gadot Biochemical so far this year, through rights issues. If Gadot Biochemical cannot meet its upcoming bond payment from other sources, such as from debt recycling funds, they will probably continue injecting capital into the company, beyond what has already been committed.
Tshuva and the Ofers' support for Gadot Biochemical is because Delek and Oil Refineries, respectively, have multibillion shekel debts of their own to bondholders, and the companies are unlikely to get entangled with the capital market over a mere NIS 200 million. A debt settlement therefore seems likely, probably without a haircut for bondholders, with Tshuva and the Ofers guaranteeing the upcoming bond payment, in the hope that 2012 will have positive cash flow.
Gadot Biochemical's share price fell 1.1% by mid-afternoon today to NIS 2.28, giving a market cap of NIS 42 million.
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