DIC Bonds Gain Recovery Support From Property & Building
Maalot raised the bonds to ilBBB+ on expected recovery of 70% to 90%, while leaving the issuer at ilBBB and liquidity less than adequate. The recovery cushion comes from Property & Building shares, while the proposed rights issue is not yet a certain funding source.
Reading the upgrade of DIC's bonds to ilBBB+ as a broad improvement in credit quality would be a mistake. S&P Maalot left the issuer rating at ilBBB with a stable outlook and continued to classify liquidity as less than adequate. The extra notch reflects a lower expected loss for creditors after a hypothetical default, not a lower probability of reaching default. In the current structure, DIC's unpledged 70.48% holding in Property & Building, worth about NIS 1.5 billion, provides the recovery cushion. After a severe valuation reduction and administrative costs, Maalot arrives at about NIS 513 million available for roughly NIS 440 million of unsecured debt, yet caps expected recovery at 70% to 90%. At the same time, high-certainty sources total about NIS 135 million against uses of about NIS 155 million, so the July bond exchange bought time without adding cash. The proposed rights issue must become funded equity before the subsidiary shares leave the balance sheet.
The Bonds Were Upgraded, the Issuer Was Not
An issuer rating mainly addresses the ability and willingness to meet all obligations on time. An issue rating can add a different layer: how much creditors are expected to recover after a default has already occurred. There is therefore no contradiction between ilBBB for the issuer and ilBBB+ for Series 10 and 11. The former was affirmed, while the latter rose by one notch as the recovery assessment moved from 3 to 2.
That distinction matters particularly for a holding company. Cash to service debt sits at the parent, while most of the value sits in a listed subsidiary. As long as the stake is liquid and unpledged, it can support a sale, financing or recovery. It does not automatically close a cash-flow gap, and it is not collateral granted to the bondholders.
The Recovery Waterfall Starts With Unpledged Shares
Maalot's default scenario assumes a 2027 event, a deep recession in Israel and the United States, weaker office demand, and pressure on occupancy, rents and asset values. Within that scenario, it cuts the value of the subsidiary shares by 65%, partly to reflect their liquidity under stress. The assumption is deliberately severe, yet the remaining asset layer still provides nominal coverage of unsecured debt.
| Waterfall Step | Amount or Assumption |
|---|---|
| Current value of unpledged subsidiary shares | About NIS 1.5 billion |
| Reduction in the default scenario | 65% |
| Gross going-concern asset value | About NIS 540 million |
| Administrative costs | 5% |
| Value available for unsecured debt | About NIS 513 million |
| Unsecured debt, including accrued interest | About NIS 440 million |
| Published recovery range | 70% to 90% |
The simple ratio of NIS 513 million to NIS 440 million is about 1.17. Maalot nevertheless does not project full recovery. The bonds are unsecured, and the company could add secured or senior debt during a deterioration path, placing new claims ahead of the existing series. The 70% to 90% range is therefore a stressed estimate, not a promised payment.
The Exchange Moved Maturities, but Sources Remain Short
Maalot assesses liquidity at the expanded solo level, excluding the subsidiary's operations. For the 12 months beginning April 1, 2026, it identified the following principal high-certainty sources and uses:
| High-Certainty Sources | NIS Million | Uses | NIS Million |
|---|---|---|---|
| Cash and cash equivalents | 30 | Current maturities | 131 |
| Undrawn credit facility | 100 | Negative cash FFO | 24 |
| Net proceeds from the Emco sale | 5 | ||
| Total | 135 | Total | 155 |
The disclosed figures produce a ratio of about 0.87. Maalot states that high-certainty sources remain below 1.2 times uses and that the company lacks capacity to withstand stress. This is the boundary of the bond upgrade: there is an asset that can support recovery after default, but there is not yet a sufficient surplus of certain funding over near-term payments.
The exchange of about NIS 203 million from Series 10 into Series 11 improved the maturity schedule and reduced maturities in the coming months. The transaction swaps debt for debt and does not increase cash. The stable outlook also assumes that the company will complete further measures to strengthen liquidity in the coming months.
Equity Must Arrive Before the Shares Are Distributed
The outline approved in principle on July 12 sets a clear sequence. DIC intends to conduct a rights issue sized to repay obligations outstanding near the offering date, and only then distribute in kind all of its Property & Building shares. The two steps were defined as inseparable parts of the same transaction.
On paper, this sequence does not remove the recovery asset and leave the debt behind. If completed as designed, shareholders inject equity before the asset is distributed, and the proceeds are intended to repay obligations. The difficulty is that the issue size, price and final commercial terms have not been set. Further corporate approvals, suitable market conditions, third-party consents and court approval for the capital reduction are still required. The rights issue is therefore not a high-certainty source today, and Maalot said it would reassess the structure if completed.
Conclusion
The bond upgrade is material for holders, but it is narrowly focused on expected loss after default. It does not improve the issuer rating, change the liquidity classification or convert the recovery range into a guaranteed payment. The counterpoint is substantial: roughly NIS 1.5 billion of unpledged shares against about NIS 440 million of unsecured debt gives the company real options, helping explain why the outlook remains stable despite the funding gap.
The next step will be decided by cash rather than by the rating label. Binding rights terms and actual subscriptions need to close the gap before the shares are distributed. A broader credit improvement would also require sources to exceed the 1.2 times threshold and, in Maalot's positive scenario, sustained EBITDA interest coverage of about 1.3 times and debt to debt-plus-equity of about 65%. A decline in the subsidiary's share value, a delay in the equity raise or more secured debt would first erode the recovery cushion supporting the upgrade.
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