Kardan N.V. — Audit Report / Information 2012

Jun 19, 2012

12 Abba Hillel Silver St. Ramat-Gan 52506 Israel +972 3 7539700 Tel +972 3 7539710 Fax

18 June 2012

Kardan N.V.

Ratings Downgraded To 'ilBBB' On Higher Leverage And Difficult Business Environment; Outlook Negative

Primary Credit Analyst: Yuval Torbati yuval_torbati@standardandpoors.com Secondary Credit Analyst: Zvi Boimer zvi_boimer@standardandpoors.com

Overview

• Kardan's loan-to-value ratio has risen to nearly 60%, mostly as a result of a steep valuation decline in its stake in Globe Trade Centre SA, but also due to impairments in its private holdings stemming from a turn for the worse in the business environment.
• We now view the company's liquidity profile as "less than adequate," as extremely weak recurring cash flow at the holdings' level, we believe, is driving the need for divestment proceeds in order to meet relatively heavy debt maturities in 2014.
• We are lowering our rating on Netherlands-based operating holding company Kardan N.V. to 'ilBBB' from 'ilBBB+'.
• The negative outlook primarily reflects the challenges we believe Kardan faces given its liquidity profile, including significant execution risk associated with divestment, which we consider as the most likely course for the company in meeting its debt amortization in 2014. The outlook also reflects the near-term operating environment in the CEE and China.

Rating Action

On June 18 2012, Standard & Poor's Maalot lowered the rating on Kardan N.V., a Netherlands-based operating holding company, to 'ilBBB' from 'ilBBB+'. The outlook is negative.

Rationale

Our rating downgrade for Kardan reflects an increase in LTV (loan-to-value ratio) to a level that we no longer considered commensurate with the previous rating. Despite significant asset disposals over the past year, namely that of holdings in Sovcom Bank (for €122 million) and distribution of Kardan Israel Ltd (ilBBB+/Stable) for €60 million, Kardan's LTV has gradually increased to nearly 60% in June 2012 from nearly 50% in July 2011. We attribute this steady climb to a sharp devaluation in its stake in listed Globe Trade Centre S.A. (GTC), whose share price has dropped by about 70% over the past 12 months, and continued 'cash burn' at the holdings' level. The company has also carried out some significant impairment in its private holdings, mostly stemming from a very difficult

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12 Abba Hillel Silver St. Ramat-Gan 52506 Israel +972 3 7539700 Tel +972 3 7539710 Fax

business environment in CEE. These impairments have also had a negative effect on our LTV measurement.

We see deterioration in the company's liquidity profile, and now consider it to be "less than adequate". While the company will likely have sufficient liquidity sources for the remainder of 2012 and through 2013, we believe it will likely face a significant challenge in meeting 2014 debt maturities of over €140 million. We anticipate that 2014 debt maturities will likely be met by significant divestment proceeds, probably the partial disposal of Kardan's unlisted holdings in Kardan Land China, fully-owned subsidiary Tahal Group International B.V. and/or disposals of companies held by KFS or Tahal. Consequently, we believe that there is considerable execution risk on the horizon, given the unlisted nature of these assets and the fact that they mostly operate in riskier, emerging markets.

According to our estimates, Kardan's portfolio value fell to €800 million as of June 1, 2012, from €1.2 billion in the second quarter of 2011. This can be attributed primarily to asset disposals and to a devaluation of the company's unlisted assets, mainly Kardan Financial Services . Kardan's net debt also contracted to about €480 million as of June 1, 2012, from €610 million as of March 31, 2011, as disposal proceeds were mostly used to redeem debt.

We understand that Kardan's management will practically freeze all new investment activities at the holding level in the near term, except for a planned €28 million rights issue in GTC, and will continue its efforts to further reduce debt mainly through additional asset disposals (partial or full).

The ratings continue to reflect the weak characteristics of Kardan's investment portfolio, including: our assessment of weak credit quality of its main holdings, a very low level of asset liquidity with a majority of the portfolio in private companies; and high leverage and negative cash flow at the holding level.

Liquidity

Kardan's liquidity is 'less than adequate' according to our criteria. As of March 31, 2012, the company (including the fully owned financial vehicle GTC Real Estate Holdings B.V.) had cash and equivalent balances of €130 million. We believe that current liquid assets and proceeds stemming from repayment of loans given to subsidiaries will likely be sufficient to pay interest, debt maturities and G&A expenses over the next 18 months (i.e up to fourth quarter of 2013). However, cash flow at the holding company level will continue to be negative and Kardan will have to cover financing expenses through its cash balances, additional debt or realization of investments. We believe that the ratio of the company's sources to uses will reach 1.8x in 2012, 1.4x in 2013, and 0.4x in 2014. To the best of our knowledge, Kardan has no new investment commitments in subsidiaries, except for a €28 million rights issue in GTC. There are several financial covenants at the holding level, which it meets with sufficient headroom. There is also some limited financial flexibility in that the shares of Kardan Land China and Tahal, together representing 70% of portfolio value, are unencumbered by liens, while the shares of KFS and GTC, about 30% of portfolio value are pledged to creditors.

In our base-case scenario, we assume that company's sources as of March 31, 2012 are:

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• Cash and liquid financial assets of €130 million;
• Committed credit lines of €6 million;
• And repayment of shareholder loans from subsidiaries and (high likelihood) asset disposal of €112 million till the end of 2014.

Our assumptions for the company's uses as of March 31, 2012 are:

• Debt maturities (principal and interest) of about €250 million to the end of 2014;
• General & administrative expenses of €15 million to the end of 2014;
• Participation in GTC equity issue totaling €28 million in 2012;
• And securities repurchase program of €32 million in 2012.

Outlook

The negative outlook primarily reflects the challenges that we believe Kardan will likely face in light of its liquidity profile in 2014. Given the illiquid nature of its portfolio and extremely weak cash flow at the holding level, we see divestment as the most likely course for the company in meeting its debt amortization in 2014. As such, there is significant execution risk involved. Additionally, we view Kardan's near-term operating environment as challenging, both in the CEE and in China. Adverse business conditions could lead to additional impairments which would raise LTV higher.

We could lower the rating should Kardan's liquidity position deteriorate further, that is if the company takes no meaningful measures by January 2013 to address its debt amortization needs in 2014, or if LTV continues to rise. Conversely, we would consider a revision of the outlook to stable if we see a large-scale divestment, bringing liquidity to levels we consider as 'adequate' for at least two years and lowering LTV towards 50%.

Rating Methodology

Despite the unlisted nature of Kardan's main assets and its control over all of its holdings, we analyze the company utilizing the balance sheet "Portfolio" approach, for the following main reasons: Its consolidated financial statements do not give any meaningful insight into its financial position due to the variety of business lines in which it is involved, all of which carry a different set of credit metrics; and its investments are managed mostly as independent operating entities and are regarded by the company as long-term financial investments. Our analysis, therefore, focuses mostly on the inherent risk of the investment portfolio, with the dominant factor being the risk of losing the equity invested in the subsidiary. The value of the held assets can be volatile, reflecting the company's performance, investors' risk appetite, liquidity, macroeconomic factors, and various macro-political risks.

Our ratings on operating holding companies reflect, inter alia, the size of the investment portfolio, the business diversification, the asset concentration, the liquidity, the geographic diversification, as well as the creditworthiness of the companies concerned. Among other supporting factors are the company's readiness to sell assets, if required, and its financial policies.

In analyzing Kardan's LTV, we estimate the value of the portfolio against the level of net debt of Kardan N.V. and its fully owned financial vehicle, GTC Real Estate Holdings B.V.

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12 Abba Hillel Silver St. Ramat-Gan 52506 Israel +972 3 7539700 Tel +972 3 7539710 Fax

Kardan recently completed a secondary market bond repurchase program, spending €50 million to buy bonds at an average price of about 22% below their adjusted par value. According to our methodology, under certain conditions, we could interpret such acquisitions as a "distressed exchange offer" which we consider as an event equivalent to a default (with a D rating). We note that our definition is not a legal one, but an expression of our independent opinion as to the circumstances surrounding the bond repurchase. We look at the following three criteria points in assessing the nature of bond repurchase:

• The buyback, in our view, is carried out by the company "under pressure", as indicated by its credit rating and liquidity profile.
• The buyback, in our opinion, testifies to the investor receiving less in value that was promised as embodied in the original security.
• The buyback in percentage terms is a significant portion of outstanding bond debt.

We believe that Kardan's current credit rating and medium-term liquidity profile point to Kardan being a "stressed buyer", according to our criteria. We also believe that the price of the buyback is significantly below the adjusted par value of the bonds. However, the quantities bought thus far have not yet reached a critical mass in our opinion. Therefore, according to S&P methodology, we believe that the buyback is currently more inspired by opportunity than absolute necessity. Nevertheless, should the company announce further bond repurchases at prices which we think are significantly below par, our assessment could change, in line with the criteria outlined above, and this could result in our reassessing such buybacks as a "distressed exchange offer" event.

Related Criteria And Research

• Criteria | Corporate| Rating Methodology for European Investment Holding and Operating Holding Companies, May 28, 2004.

This may be found at http://www.standardandpoors.com:

http://www.standardandpoors.com/ratings/criteria/en/us/;jsessionid=FnhHPcGTjwDB2K QJvmLyTwvLXVWc163Jx0yp4CnTQvVk5Pv1mdG9!-

938572379?filtername=corporates&start=100&range=50

• Criteria | Corporates | General: Methodology And Assumptions: Standard & Poor's Standardizes Liquidity Descriptors For Global Corporate Issuers, September 28, 2011.

This may be found at http://www.standardandpoors.com:

http://www.standardandpoors.com/ratings/criteria/en/us/?filtername=corporates&sta rt=0&range=50

• Rating Implications of Exchange Offers and Similar Restructurings, Update, May 12, 2009.

This may be found at http://www.standardandpoors.com:

http://www.standardandpoors.com/general/generalsearch/en/us/?search=Rating+Implic ations+of+Exchange+Offers+and+Similar+Restructurings

12 Abba Hillel Silver St. Ramat-Gan 52506 Israel +972 3 7539700 Tel +972 3 7539710 Fax

Ratings List:

	To	From
Kardan N.V.	ilBBB/Negative	ilBBB+/Postive
Series A bonds	ilBBB	ilBBB+
Series B Bonds	ilBBB	ilBBB+

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