Petrochemicals in 2025: The equity looks large, but the path from Bazan to shareholders is still narrow

Getting To Know The Company

Petrochemicals is not really a broad operating story. It is a leveraged holding-company layer sitting above Bazan. At the end of 2025 the company held, directly and indirectly through Petroleum, 769.7 million Bazan shares, equal to 24.74% of Bazan’s equity. The operating structure is thin, there is no other meaningful business engine, and the entire economic question collapses into one issue: how much value can actually move from Bazan up to the public holding company, and at what financing cost.

What is working right now is clear. In 2025 the company materially shortened the 2027 debt stack: it issued Series 11 in May with par value of ILS 318.25 million, used the proceeds to buy back Series 10 and redeem part of Series 9 early, and kept buying Series 10 in the market even after year-end. In the fourth quarter Petrochemicals’ share of Bazan’s profit rose to ILS 55.5 million from ILS 15.5 million a year earlier, and the quarter itself ended with net profit of ILS 23.1 million. In other words, the asset underneath the holdco can still generate air.

But anyone reading 2025 only through the equity line, ILS 870.9 million, is likely to miss the active bottleneck. The real issue is not whether value exists, but whether it can be accessed. The Bazan investment is carried under the equity method at ILS 1.376 billion, while the market value of the pledged Bazan shares at year-end was only ILS 762.8 million. That is a gap of roughly ILS 613 million between accounting value and market value for the same underlying asset. As long as repayment still depends on Bazan dividends, Bazan’s share price, and the ability to refinance 2027, that gap is the core of the story.

The cash layer is also less clean than it looks on first read. Current assets stood at ILS 46.0 million at year-end, but ILS 39.4 million of that was restricted cash with the Series 11 trustee. Cash and cash equivalents were only ILS 6.3 million. So the right way to read 2025 is this: the debt really was shortened, but the free flexibility left at the holding-company layer is still narrow, and the route to 2027 still depends on continued financing discipline and on Bazan’s ability to upstream value.

The Economic Map

This chart is interpretation rather than a reported line item. It uses two reported numbers, Petrochemicals’ equity and the gap between Bazan’s carrying value and the market value of the pledged shares. The implication is straightforward: what looks like an equity cushion of almost ILS 871 million looks much tighter once the Bazan position is viewed through market value rather than equity accounting.

Events And Triggers

First trigger: Series 11 bought time, it did not solve the repayment source

On May 15, 2025 Petrochemicals issued Series 11 with par value of ILS 318.25 million, gross proceeds of ILS 276.9 million, and net proceeds of ILS 268.8 million. The coupon is 5.5%, final maturity is December 2031, and the company may expand the series up to ILS 525 million par outstanding. But the move needs to be read correctly. This was a maturity-management move, not a change in the underlying repayment source.

The net proceeds were earmarked from day one for repurchases of Series 9 and Series 10 debt. Management used a financing window to push part of the wall outward, not to eliminate dependence on Bazan. That was the right move, because it lowered immediate pressure on 2027, but it did not change the basic reality that Petrochemicals remains a one-asset holdco whose debt still has to be refinanced or paid from upstream distributions.

Second trigger: 2025 was an aggressive year of shortening Series 9 and Series 10

The move did not stay on paper. In 2025 the company spent about ILS 133.5 million on buybacks of Series 10 and executed early redemptions of Series 9 principal and accrued interest totaling about ILS 140.8 million. By the date of the annual report, cumulative buybacks of Series 10 had already reached ILS 95.4 million par for total consideration of about ILS 133.4 million, while early redemption of Series 9 had reached ILS 99.8 million.

What matters here is not just the size, but the pace. After the June tender offer and the August open-ended program, the company kept buying Series 10 in the market through late December and early January. In the six local context filings included in this run, it bought roughly ILS 688 thousand par of Series 10 at prices ranging from about 146.9 to 149.25 agorot. That tail is not large enough to change the picture on its own, but it does show that the deleveraging path continued after December 31.

This chart is not about material size by itself. It is about behaviour. The company did not stop at a one-off transaction, it kept grinding down Series 10 in the market even after year-end, which reinforces the read of 2026 as an active balance-sheet management year.

Third trigger: Bazan’s fourth quarter gave the holdco some air again

On a full-year basis Petrochemicals’ share of Bazan profit fell to ILS 33.2 million in 2025 from ILS 101.9 million in 2024. But the fourth quarter improved sharply: the company’s share of Bazan profit was ILS 55.5 million versus ILS 15.5 million in the comparable quarter. After ILS 1.1 million of G&A and ILS 32.4 million of net financing expense, the quarter still ended with net profit of ILS 23.1 million.

That matters for two reasons. First, it shows the asset under the holdco can still generate enough earnings to give the parent some breathing room. Second, it reminds readers that the full-year 2025 number does not fully reflect how the year ended. The question for 2026 is whether the fourth quarter was the start of a better run rate, or just a cleaner quarter after a volatile year.

This chart explains the holdco economics better than a long narrative. When Bazan’s contribution is comfortably above financing expense, the story looks clean. When that contribution shrinks and financing costs jump, the public-company layer gets squeezed quickly.

Fourth trigger: the March 2026 dividend provides oxygen, but again proves where the cash comes from

On March 11, 2025 Bazan paid a dividend of USD 50 million, of which Petrochemicals’ share was about USD 12.4 million, or roughly ILS 45 million. That was effectively the cash engine of the holdco in 2025. After the balance-sheet date, on March 25, 2026 Bazan approved another USD 35 million dividend. Petrochemicals’ share is about ILS 26.97 million, and the company has already stated that it will use it on May 7, 2026 for another partial early redemption of Series 9 totaling about ILS 23 million including accrued interest.

This is central to the thesis. The upcoming dividend supports the deleveraging path, but it also underlines once again that Petrochemicals does not generate cash on its own. It pulls value upward from below. As long as Bazan can and will distribute, that works. If dividends slow, the problem returns to the centre immediately.

Efficiency, Profitability And Competition

The key insight in 2025 is that Petrochemicals does not really need “efficiency” in the classic operating sense. Its G&A expense was only ILS 4.4 million in 2025 versus ILS 3.4 million in 2024. The problem is not the overhead layer. The problem is that the holdco capital structure is weaker than the balance sheet suggests, and highly sensitive to two external variables: Bazan profitability and the dollar-shekel exchange rate.

What actually created the 2025 loss

Petrochemicals’ share of Bazan profit fell to ILS 33.2 million. That alone should not have produced such a deep annual loss. What pushed the bottom line negative was financing. Financing expense jumped to ILS 116.7 million from ILS 54.4 million in 2024. That included roughly ILS 51.7 million of interest on the bonds, including ILS 6.4 million of discount write-off related to early redemptions of Series 9, and roughly ILS 64.9 million of dollar remeasurement expense on net shekel liabilities after a 12.53% decline in the dollar.

This is exactly the kind of line that can mislead on first read. Petrochemicals did not “burn” ILS 116.7 million of cash on financing in 2025. A large part of the hit came from accounting translation in a structure where the key asset is measured in dollars while the debt is largely in shekels. But that is not full comfort either. When the company’s functional currency is the dollar, and a sharp dollar move can blow out financing expense, reported earnings remain highly exposed to a variable management does not control.

The quality of holdco earnings is weaker than the headline lines suggest

Even the positive financing line makes the point. Petrochemicals recorded ILS 6.2 million of financing income in 2025. Of that, ILS 4.3 million came from interest on restricted deposits, ILS 1.2 million from gain on Series 10 buybacks, and ILS 0.7 million from declines in the fair value of the deferred kicker and the tradable options. In other words, part of the “good” side of financing also came from balance-sheet management and fair-value mechanics, not from a new economic engine.

That does not make those actions irrelevant. Quite the opposite, they matter. But it is important to separate what improves the liability structure from what actually builds a recurring source of value. Debt buybacks improve the maturity profile, but they do not by themselves create repayment capacity.

The Bazan stake looks strong in the accounts, less impressive when viewed through the traded collateral

The Bazan investment note sharpens the gap between accounting and shareholder economics. The investment in Bazan fell in 2025 from ILS 1.592 billion to ILS 1.376 billion. The movement included ILS 33.2 million of share in Bazan profits, a ILS 45.0 million dividend offset, a ILS 16.0 million decline in the company’s share of Bazan reserve movements, and a ILS 188.2 million negative translation effect. The company tested the investment for impairment indicators and concluded that none existed.

But that is exactly where readers should stop and think. No accounting impairment is not the same thing as stable market value. At the end of 2025 the market value of the pledged Bazan shares was, as noted, only ILS 762.8 million. That is not a side note next to a ILS 1.376 billion carrying value. It is the market’s actual price for the same asset on the same day. For Petrochemicals shareholders, the real question is not whether Bazan creates value, but how much of that value actually gets through the debt layer and on what timetable.

This chart matters because it shows that 2025 was not just a weaker Bazan-profit year. The biggest hit came from translation. That is another reason why the holdco bottom line remains more volatile than readers might assume from Bazan’s operating performance alone.

Cash Flow, Debt And Capital Structure

Cash flow

The right framing here is all-in cash flexibility, not normalized cash generation from an operating business. Petrochemicals does not run a plant or a retail network that throws off internal recurring cash. It receives a dividend from Bazan, and it has obligations above that layer.

Cash flow from operating activities was ILS 40.8 million in 2025 versus ILS 146.2 million in 2024. But almost all of that 2025 figure was the Bazan dividend of ILS 45.0 million, offset mainly by ILS 4.2 million of the company’s own ongoing expenses. So the operating cash flow of the holdco does not mean the company “generated” ILS 40.8 million. It means that a distribution came up from below and more than covered parent-level costs.

From there the picture gets more interesting. Investing activities used ILS 35.5 million, mainly because proceeds from Series 11 and the Bazan dividend were placed with bond trustees before being drawn for buybacks and redemptions. Financing activities used ILS 5.3 million, after debt buybacks and early redemptions, offset by the net proceeds of Series 11. The net result was only ILS 0.3 million of additional cash, taking the balance from ILS 6.0 million to ILS 6.3 million.

What that chart says is simple: the company did not build a larger free cash cushion in 2025. It routed cash through trustee accounts and used it to shorten debt. That was the right move, but it also explains why the story still depends on refinancing rather than suddenly becoming a story of surplus liquidity.

Debt and covenants

At the end of 2025 the book debt stack was ILS 33.6 million in Series 9, ILS 201.6 million in Series 10, and ILS 281.2 million in Series 11. In addition, there was a deferred kicker liability for Series 10 of ILS 19.1 million. On the company’s own presentation, par debt plus accrued interest totaled about ILS 565.7 million. The dates are simple: Series 9 in April 2027, Series 10 in July 2027, Series 11 in December 2031.

At first glance the covenants look very comfortable, and they are. As of December 31, 2025 the Series 9 loan-to-value ratio was only 4.58%. By March 25, 2026, after the newly approved dividend but before payment, it had already improved to 3.35%. For Series 11 the minimum equity covenant is ILS 200 million, while actual equity stood at ILS 870.93 million. The Series 11 LTV covenant is not yet active, because it only kicks in after Series 9 and Series 10 are fully repaid and deleted.

But readers should not stop there. The covenants are not the live pressure point today, and that matters. The live issue is still the repayment source for 2027. The fact that the company is comfortably inside covenants now only means it bought time. It does not remove the need to keep pulling cash up from Bazan or to return to the market with an acceptable refinancing profile.

The deferred kicker and the convertible loan leave another layer of sensitivity

Series 10 is not just ILS 201.6 million of book debt. It also carries a deferred kicker which was valued at ILS 19.1 million at the end of 2025. The mechanism ties 18% of 534.95 million Bazan shares to the positive difference, if any, between the average Bazan share price over the 30 trading days before repayment and an adjusted base price of ILS 0.74. If Bazan’s share price is materially above that level at repayment, the payment to Series 10 holders grows.

On top of that, the company has a ILS 100 million equity loan that carries no interest, is unsecured, and is convertible into 33.33 million Petrochemicals shares. That is roughly 33% of the year-end share count. So even if the current covenants are comfortable, common shareholders still sit under a structure where dilution remains a real option if the path to refinancing becomes less friendly.

Outlook

Before looking forward, five non-obvious findings should anchor the read:

1. Reported equity is much larger than the value visible in the market. The Bazan investment is carried at ILS 1.376 billion, but the pledged Bazan shares were worth only ILS 762.8 million at year-end.
2. The 2025 debt work was real, but it bought time rather than creating a new repayment source. The company pushed part of the wall outward to 2031, it did not solve the holdco dependence on Bazan.
3. The holdco’s operating cash flow is essentially dividend flow. The ILS 40.8 million operating cash inflow in 2025 was almost entirely the ILS 45 million dividend from Bazan.
4. The current covenants are very comfortable, but that is not the main test. The real test is what 2027 refinancing looks like as the window gets closer.
5. There is still an equity-sensitivity layer. The Series 10 deferred kicker and the convertible equity loan both leave real optionality above common shareholders.

The right label for 2026 is a bridge year with a proof test, not a solution year. The company says it does not expect to need fresh money over the next year for ongoing operations, but in the same breath says it is continuously examining refinancing options and cheaper debt. That wording matters. It says the short-term operating layer is covered, while the strategy remains fundamentally financing-led.

What has to happen for the thesis to strengthen

First, Bazan needs to keep paying dividends at a rate that lets Petrochemicals continue cutting the 2027 stack in practice. The USD 35 million dividend approved on March 25, 2026 is a good start, but it is not enough to focus on that event alone. Investors need to ask whether Bazan can keep producing similar upstream cash later as well.

Second, Bazan’s share price needs to remain at a level that supports both comfortable collateral coverage and a credible refinancing conversation. At year-end 2025 the Series 9 loan-to-value ratio was only 4.58%, and the company itself notes that a 94.61% drop in Bazan’s share price would be required to breach the Series 9 covenant. That is a very wide cushion. But refinancing markets do not price only off the live covenant. They price off willingness to lend against an asset that looks accessible and stable.

Third, the company needs to keep reducing the actual 2027 debt stock, not just talking about it. This is where the late-December and January buyback filings matter. They show management staying active in the market every few days, even if the daily amounts are small. That is exactly the kind of behaviour that can turn 2026 from a year of talk into a year of measurable execution.

What the market may miss on first read

The first read on Petrochemicals may focus on one simple gap, a market capitalization of roughly ILS 321 million at a 318-agorot share price versus equity of ILS 871 million. That is incomplete. Once Bazan’s carrying value is replaced with the year-end market value of the pledged shares, the implied equity left for shareholders looks much lower, around ILS 258 million. That is far closer to where the market actually prices the company.

The first read may also frame 2025 as simply a deterioration because of the ILS 81.7 million loss. That is incomplete too. A large part of the damage came from translation and financing, not from a collapse in Bazan’s underlying economics. The right question is not whether 2025 was “bad,” but whether 2026 can turn that accounting setback into continued real deleveraging.

What could improve the read, and what could break it

What would improve the read is a sequence of three things: more upstream dividends from Bazan, further actual reduction of the 2027 debt, and a capital market that stays open enough to give the company a credible refinancing path. If that happens, 2025 will look in hindsight like the right transition year, the year when management used a window to push out part of the wall and improve its position.

What would break the read is the opposite sequence: weaker or delayed Bazan dividends, a sharp fall in Bazan’s share price ahead of the refinancing window, or a bond market demanding too much risk premium. In that case, the gap between accounting value and accessible value would quickly move from a theoretical debate to a very practical problem.

Risks

Dependence on Bazan remains near total. Petrochemicals is a holdco with one dominant asset. If Bazan earns, distributes, and holds market value, the parent can breathe. If any of those variables weakens, Petrochemicals becomes more exposed immediately.

The real financing test still lies ahead. The company states that it currently has no loans or credit lines other than the bond series. That may sound clean, but in practice it means financing flexibility depends on the bond market and on the ability to open new debt ahead of 2027. That is not a 2025 problem, but it is absolutely something investors should think about now.

FX exposure already hit earnings, and can keep doing so. In 2025 the 12.53% decline in the dollar created about ILS 64.9 million of financing expense on net shekel liabilities. That is not a direct cash outflow, but it does show how the company can swing from profit to loss without a dramatic change in the underlying asset.

The common-equity layer is not free of dilution risk. The ILS 100 million convertible equity loan, which can turn into 33.33 million shares, together with the remaining options, is a reminder that any future equity solution could come at a meaningful dilution cost.

Bazan itself remains exposed to geopolitics and operations. In June 2025 Bazan’s energy center was significantly damaged, and the refinery complex together with subsidiary facilities in the Haifa Bay site was shut down. Even though Petrochemicals does not operate those assets itself, every such event flows directly through Bazan’s profits, dividend capacity, and collateral value.

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Conclusion

Petrochemicals looks better in 2025 than the headline loss suggests, but less clean than the equity line implies. The debt really was shortened, Series 11 bought time, Bazan provided air again in the fourth quarter, and the March 2026 dividend continues the path. On the other side, the value that matters to common shareholders still has to make its way through a debt layer, through Bazan dividends, and through a refinancing window that has not yet been truly tested.

Current thesis in one line: Petrochemicals improved its debt profile, but it is still a holding company whose equity value will continue to be determined mainly by how successfully it can turn Bazan from an accounting asset into accessible cash.

What changed relative to the earlier understanding is that the 2027 wall now looks lower, but not because a new repayment engine was found. It looks lower because management has already shifted part of the burden to 2031 and keeps grinding down Series 10. The strongest counter-thesis is that Bazan will continue to pay usable dividends, Bazan’s share price will stay supportive, and by the time 2027 arrives a much larger part of the debt will already be gone, making the market too harsh today on the holdco layer. What could shift market interpretation in the near term is a continued sequence of dividends and actual debt buybacks, versus any sign that the Bazan-to-parent pipeline is weakening.

Why this matters: Petrochemicals is a sharp example of the gap between value on paper and value that is actually reachable for common shareholders. If you do not separate those two, the balance sheet can look like the problem has already been solved when in practice the route still runs through dividends, traded collateral, and refinancing.

For the thesis to strengthen over the next 2 to 4 quarters, the company needs continued Bazan dividends, further real reduction of the 2027 stack, and a refinancing window that remains open enough to avoid a shareholder-unfriendly capital solution. What would weaken the thesis is an interruption in that dividend pipeline, a meaningful drop in Bazan’s share price, or a much harsher debt market just as the clock to 2027 keeps running.