Publication of Draft Agreement with Trustee for Potential New Israeli Debenture Series

Rhea-AI Summary

Formula Systems (1985) (FORTY) has published a draft agreement for a potential new series of secured, non-convertible debentures—Series D Debentures—in Israel. These debentures would be secured by a first lien on shares of Matrix IT , Sapiens International N.V., and Magic Software Enterprises , with a loan-to-value ratio not exceeding 60%. The repayment schedule includes seven annual payments of 12% from 2027 to 2033, with a final 16% payment in 2034. Interest payments begin on December 1, 2024, followed by semi-annual payments through 2034.

S&P and Midroog have issued credit ratings of ilAA- and Aa3.il respectively for the potential Series D Debentures, for up to NIS 150 million. These ratings match Formula's current Series C Debentures and corporate credit ratings. The offering is subject to regulatory approvals and will be available only to Israeli residents.

Positive

• Secured debentures with first lien on shares of publicly-traded subsidiaries
• Credit ratings of ilAA- and Aa3.il for the potential Series D Debentures
• Reaffirmation of Formula's corporate credit rating as ilAA-/stable and Aa3.il/stable

Negative

• Potential increase in debt with new debenture issuance
• Pledging of subsidiary shares as collateral

Insights

Financial Analyst

Formula Systems' potential issuance of Series D Debentures is a strategic financial move with both positive and negative implications. On the upside, it could provide up to NIS 150 million in fresh capital, enhancing liquidity. The loan-to-value ratio cap of 60% and the secured nature of the debentures, backed by shares of key subsidiaries, offer some protection to investors. However, this also means encumbering valuable assets. The extended repayment schedule (2027-2034) provides financial flexibility but prolongs debt obligations. The reaffirmed credit ratings (ilAA-/Aa3.il) suggest stability, but investors should note these are still below the highest grades. Overall, while this move may strengthen Formula's financial position, it also increases leverage and financial complexity.

Legal Expert

The draft agreement for Series D Debentures presents several legal considerations. The issuance is subject to multiple regulatory approvals, including the ISA and TASE, which adds a layer of scrutiny and potential delays. The first lien security on subsidiary shares is a strong legal protection for debenture holders but could potentially limit Formula's future financing flexibility. The company's explicit statement that this is not an offer in the US and the emphasis on compliance with the Securities Act demonstrate prudent legal risk management. However, the complex structure and long-term nature of the debentures may pose ongoing compliance challenges, particularly in maintaining the required loan-to-value ratio over time.

Market Research Analyst

This potential debenture issuance reflects Formula Systems' proactive approach to capital management in a challenging market. The decision to secure the debentures with shares of high-profile subsidiaries like Matrix IT, Sapiens and Magic Software could be seen as a vote of confidence in these entities. The staggered repayment structure aligns with a long-term growth strategy, potentially allowing for reinvestment of capital in the interim. However, the market should consider the broader implications of this move. It might signal organic growth opportunities or cash flow constraints. The timing of the issuance, amidst global economic uncertainties, could also impact investor appetite and pricing. This move could reshape Formula's market perception, potentially affecting its valuation and stock performance in the near term.

OR YEHUDA, Israel, Aug. 05, 2024 (GLOBE NEWSWIRE) -- Formula Systems (1985) Ltd. (“Formula”) published with the Tel Aviv Stock Exchange (the “TASE”) and the Israel Securities Authority (the “ISA”) a draft agreement with a trustee for a new series of secured, non-convertible debentures—Series D Debentures— that may potentially be issued by Formula in Israel. The Series D Debentures would be secured by a first lien on certain shares of certain publicly-traded subsidiaries held by Formula—specifically, Matrix IT Ltd., Sapiens International Corporation N.V., and Magic Software Enterprises Ltd.— with the number of pledged shares to be determined based on a loan-to-value ratio that will not exceed 60% of the value of the pledged shares.

The Series D Debentures would be issued (if issued) pursuant to (i) Formula’s existing shelf prospectus, dated September 22, 2022, that enables Formula to offer and issue, among other securities, debt securities, as well as (ii) a shelf offering report that would supplement the shelf prospectus and provide details concerning the Series D Debentures.

The Series D Debentures would be subject to the following schedule for repayment of principal, and payment of interest on outstanding principal amounts:

Principal: 

	●	Principal would be repaid in seven equal annual payments of 12% each, on December 1 of each year from 2027 through 2033;
	●	The final principal repayment (of the remaining 16% of the principal) would be made on December 1, 2034;

Interest:

	●	The initial interest payment will be made on December 1, 2024; and
	●	Additional interest payments on outstanding principal will be made on a semi-annual basis, on June 1 and December 1 of each year from 2025 through 2034.

Publication of the final-form indenture for the Series D Debentures, as well as the actual offering of the Series D Debentures, are subject to receipt of the required approvals under Israeli law, including the approval of the Company’s board of directors, the ISA and the TASE.

Publication of Rating Reports for Potential New Israeli Debenture Series and Corporate Credit Ratings

Also on August 5, 2024, Formula reported publicly to the TASE and ISA that Standard & Poor’s Maalot (“S&P”) and Midroog (an affiliate of Moody’s) (“Midroog”) had issued credit ratings of ilAA- and Aa3.il for the potential new secured Series D Debenture series, for an aggregate principal amount of up to NIS 150 million (par value) that may be issued and sold. Those credit ratings echo the credit ratings for Formula’s other current series of secured debentures (Series C Debentures) that are traded on the TASE and for Formula as an issuer.

Each of S&P and Midroog has furthermore reaffirmed Formula’s corporate credit rating, as the potential issuer of the new Series D Debentures, as ilAA-/stable, and Aa3.il/stable, respectively. The credit ratings are based on a number of factors and considerations.

Important Note re: Debentures Offering and Related Disclosures

This Report of Foreign Private Issuer on Form 6-K is not an offer of securities for sale in the United States. Any securities— including the Series D Debentures to be potentially offered— may not be offered or sold in the United States absent registration under the US Securities Act of 1933, as amended (the “Securities Act”) or an exemption from the registration requirements thereunder. Any offering of securities pursuant to the shelf prospectus and any supplemental shelf offering report will be made only in Israel to residents of Israel, will not be registered under the Securities Act and will not be offered or sold in the United States or to U.S. persons (as defined in Regulation S under the Securities Act), except pursuant to an applicable exemption from registration under the Securities Act.

Press Contact:

Formula Systems (1985) Ltd.
+972-3-5389487
ir@formula.co.il

FAQ

What is the repayment schedule for Formula Systems' potential Series D Debentures?

The Series D Debentures would be repaid in seven equal annual payments of 12% each from 2027 to 2033, with a final 16% payment in 2034. Interest payments begin on December 1, 2024, followed by semi-annual payments through 2034.

What credit ratings did Formula Systems (FORTY) receive for its potential Series D Debentures?

Standard & Poor's Maalot and Midroog issued credit ratings of ilAA- and Aa3.il respectively for Formula Systems' potential Series D Debentures, for an aggregate principal amount of up to NIS 150 million.

How are Formula Systems' (FORTY) potential Series D Debentures secured?

The Series D Debentures would be secured by a first lien on certain shares of publicly-traded subsidiaries Matrix IT , Sapiens International N.V., and Magic Software Enterprises , with a loan-to-value ratio not exceeding 60%.

When does Formula Systems (FORTY) plan to start interest payments on the potential Series D Debentures?

The initial interest payment for the potential Series D Debentures is scheduled for December 1, 2024, with subsequent semi-annual payments on June 1 and December 1 of each year from 2025 through 2034.