A company owned by the man who so
 successfully shook up the global 
 diamond industry and seemed set to rival De Beers, Uzbekistan-born Israeli billionaire Lev Leviev, is in deep financial trouble that could threaten his diamond interests.

Leviev has two main pillars to his business empire. 
There is the Lev Leviev group, which covers his diamond interests, including LLD Diamonds, which is the only diamond manufacturing (cutting, polishing and marketing) company that controls its own diamond mines. 
LLD’s diamond exports from Israel were last year worth $417-million, a 20% decline in comparison with exports for 2007. 
In 2005, the company’s exports were worth more than $600-million.

Then there is Africa Israel Investments, owned 74,83% by Leviev, which is an investment holding company which controls, or has equity in, a wide range of companies across a wide range of countries, but with a main focus on 
real estate. And that is where disaster struck.

Africa Israel invested very heavily in property, particularly in the US, and especially in New York. 
Leviev spent some $4-billion in his American property buying spree. 
He spent $1,5-billion in the first six months of 2007 alone, buying US real estate. 
He paid $525-million to buy the 43rd street office tower in Manhattan from Tishman Speyer Development, just three years after Tishman Speyer had bought the building for just $175-million.

He funded this, and other real estate investments in other countries (generally in Eastern Europe and Russia), by borrowing. 
For example, he borrowed $711-million to buy the old New York Times building in Manhattan (the newspaper had already moved to new premises). The result was that, for every Israeli shekel (NIS) of equity, Africa Israel had borrowed another NIS5,50.

Leviev ignored the warning signs that began to appear later in 2007, presaging the global recession. 
He appears to have been blinded by some 20 years of almost continuous business 
triumphs and by his success, after the September 11, 2001, terrorist attacks on New York and Washington, in buying properties in the former city after the Manhattan property market collapsed, after the attacks.

He later said that the “wise man sees ahead”. 
“The trick is to make difficult deci-
sions and put a lot of money into them. 
“That’s what we did in New York after the collapse of the Twin Towers in September 2001. 
“Entrepreneurs have to identify the potential in markets and make decisions in real time.”

Back in 2003, Forbes magazine quoted him as saying: “I’m not going to let anyone else tell me how to run my business. I grew up in the Soviet Union. I knew what it was to be afraid. I can remember being beaten regularly by bullies at school, and I said to myself I would never be afraid of anybody or anything again.”

The consequence was that he was totally unprepared for the global financial crisis. 
The value of the properties he bought at the height of the market in the US has fallen by half, or more, to between $1,5-billion and $2-billion.

The old New York Times building, bought for $711-million, was, during the first half of this year, independently appraised as being worth just $220-million, with much of its office space standing empty. 
But, even if it is fully occupied over the next three years, that will only increase its value to $390-million.

As a result, Africa Israel made losses of almost NIS5-billion in the third and fourth quarters of 2008, and a further NIS1,4-billion in the second quarter of this year. 
Africa Israel’s equity has shrunk by almost NIS2-billion, meaning that the company is now in breach of its financial covenants with the banks it borrowed from. 
(From March to late September this year, the shekel has had an average exchange rate of just under NIS4,0 to $1,00.) 
“The expansion in the US was a big mistake for us,” admitted Leviev in early September.

Africa Israel owes its bondholders NIS7,5-billion. 
The company’s assets are calculated to be worth much less than its debts. 
Leviev is reported to have stated that he has the cash to pay those bondholders whose bonds come due by 2011. 
That is no comfort to the other bond-holders.

Leviev has proposed that the bond-holders write off NIS3-billion of Africa Israel’s debt, get repaid only NIS500-million, and accept NIS4-billion in bonds, deferred 15-year capital notes (which would earn no interest) and some shares in the company. 
Unsurprisingly, Africa Israel’s creditors were not amused.

One of the biggest, Psagot Investment House, which holds about 10% of Africa Israel’s bonds, has rejected the proposal as “one-sided and completely unacceptable” and has warned that it will take all measures necessary to protect the rights of its provident fund members, including applying to the courts for the liquidation of Leviev’s company. 
Psagot is demanding that either Leviev himself inject a lot of capital into Africa Israel (Leviev says he has already put NIS1-billion in, but this does not seem to be enough) or he accept a big dilution of the current shareholders to create a situation which reflected the bondholders’ full financial rights.

That would result in Leviev losing control of, and having very little influence in, what had been his company. 
But liquidation would mean that Africa Israel would cease to exist, although its subsidiaries would continue to exist, but with new owners. 
As Africa Israel, and not the Lev Leviev group, is seen as the basis of his power and influence in Israel, either outcome would be a very bitter pill, indeed. 
However, investing more money into the foundering company would require him to sell part, perhaps a large part, of his diamond business.

Israeli analysts expect Leviev to survive in business, but to be much less rich, and much less influential. 
His days of challenging De Beers may be over, for good.