Hilla Offices: Series C and D Sit Near the 75% Interest Step-Up Line Before the Centennial Mortgage Is Registered

Hilla Offices is not showing broad covenant distress: adjusted equity is about NIS 175 million, adjusted equity to assets is about 27%, and net financial debt to Cap is about 50%. Those numbers are far from the broader pressure lines in the trust deeds. The narrow issue is the debt-to-collateral ratio of Series C and Series D. At the end of March 2026, Series C stood at 74% and Series D at 73%, against a 75% threshold that can trigger a coupon step-up if the breach continues for two consecutive quarters. The mortgage registration over Centennial Park, a key part of the Series D collateral package, has still not been completed, and the fourth extension period is expected to end on June 28, 2026. The current read is not that the company is heading into an immediate covenant breach. It is that the headroom before higher interest is too narrow for another Centennial collateral delay to remain a minor legal matter. The next proof point is simple: the mortgage needs to be registered, and the Series C and D ratios need to move away from 75%.

The Collateral Ratio Leaves Little Room Before Higher Interest

The bondholder appendix sharpens the difference between a broad covenant and a trigger that is already close. At the company level, equity and debt to Cap leave comfortable room. At the collateral level for Series C and D, the headroom is only one or two percentage points.

This is not the same as an immediate acceleration event. Note 4 describes a ladder: if the Series C or Series D debt-to-collateral ratio rises above 0.75 and remains there for two consecutive quarters, the coupon step-up mechanism applies. Above 0.8, the company must provide the trustee with additional or replacement collateral so that the ratio returns to 0.8 or below. The first live line for investors is therefore not 80%, but 75%, because it can raise the cost of debt before the company reaches a more severe layer of pressure.

The broader numbers explain why this is still not a distress read. Adjusted equity of about NIS 175 million is above the NIS 45 million acceleration threshold and the NIS 60 million coupon step-up threshold. Adjusted equity to assets, at about 27%, is above the 15% and 22.5% thresholds. Net financial debt to Cap, at about 50%, is far below the 85% and 90% thresholds. The pressure point is therefore not general compliance with the trust deeds, but the specific series-level collateral ratio that is already close to the line where debt becomes more expensive.

That detail changes how the quarter should be read. UK rental income is already visible in the leasing numbers, and the company is compliant with its financial covenants. The next work is elsewhere: whether the acquired assets become registered collateral and create wider collateral headroom, or whether the value remains on the balance sheet while bondholders still face a nearby interest threshold.

Centennial Is No Longer Just a Registration Issue

Centennial Park was acquired in October 2025, and the Series D trust deed required the company to complete the mortgage registration within four months from completion. Three extensions have since been approved, and the fourth extension period is expected to end on June 28, 2026. The asset itself is not the operating problem: the three office buildings are fully leased to single tenants under long-term lease agreements. The friction sits in the move from an income-producing and appraised asset to a registered security package that Series D holders can measure without an interim period.

In income-producing real estate, collateral registration after an acquisition is not unusual by itself. Companies finance properties with debt, close transactions, complete pledges and refinance as part of the model. What is abnormal here is the combination of a delayed registration process and debt-to-collateral ratios that are already near the coupon step-up line. Series D is the more direct Centennial exposure, while Series C shows that narrow headroom is not confined to one bond series. When two relatively new series sit at 73% and 74%, another extension is not just a technical timetable update. It keeps the cost of debt tied to the same collateral process the company was supposed to complete.

The distribution restrictions in Note 4 add another layer. As long as Series B, C and D remain outstanding, the company may not repay owner loans or capital notes and may not make distributions. The near-term risk is therefore not cash leakage to shareholders. The risk is that the collateral does not get registered on time, the debt-to-collateral ratios do not move away from the line, and the cost of debt rises while the UK assets still need to prove a fuller quarterly contribution.

The Next Read Depends on Registration and Distance From 75%

The favorable path is clear: the Centennial mortgage is registered before the end of the fourth extension period, Series D receives a more direct collateral package, and Series C and D move away from the 75% threshold in the next reports. In that case, the quarter goes back to being mainly about the shift from acquisitions to rental income. Another delay would change the weight of the issue. It would not prove distress, but it would show that the collateral mechanism is still trailing the pace of asset acquisitions and debt issuance.

The current conclusion is that Series C and D do not signal a crisis, but they leave too little room for error around Centennial. A reader who looks only at broad covenant compliance misses the layer that can make debt more expensive before a more severe event arrives. By the end of June 2026, the proof point is not another acquisition or another valuation. The company needs to complete the mortgage registration and show a debt-to-collateral ratio farther away from 75% in the next report.