Prashkovsky registered thousands for apartment tender - but takes a loan at 10% interest
While real estate companies suffer from financing costs that weigh on them and erode entrepreneurial profit, the company took a loan of 22 million shekels at a prime plus 5% interest rate. At the same time, the company claims that thousands registered for a tender in which it marketed 400 apartments.
Real estate companies are suffering during this period from heavy financing costs. The prime interest rate stands at 5% and most contractors raise funds at high interest rates of 7% and even more. The real estate company Prashkovsky, which recently launched a tender for the sale of apartments, claims that thousands of people registered for the tender that closed in the middle of the month. It has not yet published the exact results, but in the meantime, it decided to raise 22 million shekels in an expensive loan.
According to the terms of the agreement it made with one of the largest financial institutions in Israel, Prashkovsky will pay an exceptional interest rate of prime plus 5%, meaning 10%. It will have to pay the repayment within 12 months. Beyond the cash raising, what catches the eye in the report is the heavy price and the exceptional interest that the company will pay for the credit. As part of the agreement, Prashkovsky will pay an extraordinary margin of 5% above the prime interest rate in the economy - pricing that reflects an especially high risk premium for a public company in the current interest rate environment, this alongside a one-time credit allocation fee of 0.25% of the loan principal.
The purpose of the new credit is to repay a previous loan of 5 million shekels that was provided to the company in the past by the same financial institution. Why is it taking more? Mainly to "direct the money to the current needs of the company". The fact that part of the financing is intended for recycling an existing debt to the same lender raises a question mark regarding the point liquidity pressure in which the company is located.
The interest that Prashkovsky will pay is derived from the low level of collateral received by the lender. The company provides second-degree liens on rights in real estate in Rishon LeZion. These assets are already pledged in the first degree in favor of Hermetic Trust. The financial lender enters from a position of inferiority behind the bondholders, and therefore it may be that it demanded appropriate compensation in the form of an especially high interest rate.
The company committed to maintain a loan-to-value (LTV) ratio that will not exceed 70% in relation to the loan principal and Series A bonds against the value of the real estate, and also will not exceed 90% including the accrued interest. Alongside this, a sweeping prohibition was set on dividend distribution throughout the entire financing period until full repayment of the loan.
Additional sanctions include an additional interest rate increase of 0.25% per year if the equity-to-balance ratio drops below 22.5%, and even grounds for immediate demand for repayment of the entire loan if the company's minimum equity drops below 110 million shekels.
Prashkovsky is expected to publish the results of its tender this week and it will be interesting to see if the thousands of participants purchased the 400 apartments it marketed as part of the tender, how many apartments remained and whether the average embedded discount stands at about 6-8%, as we predicted in an earlier article we conducted, or whether it will be different.
