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Israel Billionaires Put Own Interest Ahead of Debt Investors

Billionaire Isaac Tshuva.  Source: Delek Group Ltd via Bloomberg
Billionaire Isaac Tshuva. Source: Delek Group Ltd via Bloomberg

March 22 (Bloomberg) -- Israeli billionaires, whose companies gorged on debt for a decade, are putting their interests ahead of bondholders’ as the nation confronts the most restructurings in three years.

Almost 40 companies are seeking debt forgiveness from creditors after borrowing costs rose to the highest level in two years and investors questioned their ability to repay. Billionaire Isaac Tshuva’s Delek Real Estate Ltd. and Ilan Ben Dov’s Tao Tsuot Ltd. are pressuring bondholders to accept new terms by offering shares to avoid making cash payments on bonds.

Israel’s biggest borrowers, who helped build the country of 7.8 million people into an economy that is growing at three times the pace of the Group of 10 nations and delivering the world’s best risk-adjusted stock-market returns, have struggled after losses in real-estate deals overseas. The tycoons control the nation’s 10 biggest corporations, comprising 41 percent of the value of listed companies, Finance Ministry data show.

“It’s not healthy that bonds are being turned into equities,” Bank of Israel Governor Stanley Fischer said in an interview on Feb. 20 in his Jerusalem office. “When the public buys a bond from a corporation, they want a bond, and not an asset that comes with a high probability of being reorganized.”

The value of corporate bonds sold outside the banking industry sank 56 percent in the second half of 2011 from the first six months, according to Bank of Israel data. About 20 billion shekels ($5.3 billion) of company debt, or 7 percent of outstanding securities, are at risk of default, data provided by the Israel Securities Authority show.

‘Credit Crisis’

Delek Real Estate, owned 50.8 percent by 63-year-old Tshuva, asked investors in January to accept a debt settlement agreement that will give holders of two of its bond series a 46 percent equity stake in exchange for accepting about a 19 percent loss on principal.

Tao Tsuot, 69.7 percent-owned by Ilan Ben Dov, 55, said on Jan. 15 that creditors agreed to a deal that includes him transferring 6 million shares, or a 21.4 percent stake, of Petach Tikva, Israel-based Suny Electronics Ltd. to Tao Tsuot.

Yields on 5.1 percent bonds due in December 2020 from billionaire Nochi Dankner’s IDB Holding Corp. soared to a record 19.2 percent on Dec. 20 after a debt buyback plan by the Tel Aviv-based company failed to reassure investors that it can meet obligations. The yield rose 16 basis points to 15.79 percent today, the biggest increase since March 6.

“What is happening now is a form of credit crisis,” Dudi Reznik, the head of fixed-income research at Tel Aviv-based Bank Leumi Le-Israel Ltd., Israel’s largest bank by assets, said by phone on March 11. “Investors are becoming wary of lending to companies in the face of recent debt settlements.”

Shares Tumble

Officials from Delek Group Ltd., Tao Tsuot and IDB Holding who asked not to be identified because of company policy declined to comment in statements sent by e-mail.

The yield spread between Israel’s indexed corporate and government bonds, a reflection of how costly it is for companies to borrow, widened to 290 basis points, or 2.9 percentage points, in November, the biggest difference since August 2009, before shrinking to 280 a month later, the latest central bank data show. The similar U.S. spread was 266 basis points at the end of November and has since narrowed to 189 as of March 21, according to Bank of America Merrill Lynch’s U.S. Corporate Master Index.

Israeli government dollar-denominated bonds due in March 2019 yielded 3.46 percent today, up six basis points in 2012, according to data compiled by Bloomberg.

Share Slump

Shares of Delek Real Estate and Tao Tsuot plunged in four of the last five years, with their value dropping 98 percent between the end of 2007 and the end of 2011. Since reaching an initial debt accord with bondholders on Jan. 31, Delek Real Estate has lost 22 percent and Tao Tsuot is down 24 percent since announcing a preliminary agreement on Dec. 11.

IDB Holding, which invests in communications, electronics and real estate, said on Feb. 23 that it raised about 321 million shekels in a share offering. The holding company needs the money to pay 1.2 billion shekels in bond principal and interest payments this year, according to data compiled by Bloomberg. Shares of the company, which plunged 70 percent in 2011, have fallen 24 percent since the Feb. 23 announcement.

“We are extremely bothered by debt settlements when they are done in a way that is not fair to investors,” Shmuel Hauser, chairman of the Israel Securities Authority, said in an interview in Tel Aviv on Feb. 21.

‘Easy’ Money

Israel’s bonds have lured investors seeking to tap into the country’s economic growth, which surpassed 4 percent annually in seven of the last eight years, data compiled by Bloomberg show. The expansion will probably slow to 2.8 percent this year, the Bank of Israel said on Dec. 26, compared with an earlier forecast of 3.2 percent.

Corporate bonds surged nine-fold between 2004 and 2010 to 280 billion shekels, according to securities authority data. The growth rates of Israel’s corporate bond market in recent years are “exceptional” relative to other economies mainly because of the companies’ ability to raise large amounts of debt without collateral, contractual commitments or financial yardsticks, the Bank of Israel said in its 2009 annual report.

In 2010, the nation’s 10 largest companies accounted for about 50 percent of debt sales in the local market, the Finance Ministry said in a February report.

As Israel’s economy grew, the non-banking market opened up and companies increased borrowing to boost revenue, Hauser said. Institutional investors “were too easy in investing in these bonds and it would be a lot harder for them to do that today,” he said.

‘Structural Fragilities’

Fischer said in February at a conference in Herzliya, Israel that the rising number of debt restructurings -- a three-year record based on data from the Israeli stock exchange -- may harm the local economy.

About 20 business groups, mainly family-controlled and structured in pyramid form, own 25 percent of listed companies on the Tel-Aviv Stock Exchange, one of the highest concentrations among developed economies, the Bank of Israel said in its 2009 annual report.

While Israel’s stock market produced the best risk-adjusted returns of developed markets in the past decade, according to the Bloomberg Riskless Return Ranking, there are “structural fragilities” in Israel’s corporate bond market, the International Monetary Fund said in a Feb. 13 report. The Washington-based lender urged the government to study the possible harm to the financial system of one or more of the country’s large corporate groups going bankrupt.

Pyramid Structures

Prime Minister Benjamin Netanyahu’s government, seeking to boost competition and break conglomerates, recommended on Feb. 22 that Israeli companies limit their pyramid structures to no more than three public layers and proposed a four-year deadline for corporations to comply with the new rules.

IDB has a holding structure of five public layers, according to Ron Alkon, an analyst at Epsilon Investment House Ltd. in Tel Aviv.

Should the restructurings be implemented, Delek Group and IDB Holding will have to sell assets and merge business activities, according to Raz Mor, a corporate debt analyst at DS Securities & Investments Ltd. in Tel Aviv.

“The changes may help to avert the collapse of a large corporation but they will also make it more difficult for controlling shareholders to recycle debt as the power of minority shareholders will be elevated,” Mor said by phone on March 19.

Not Participating

The Israeli Supervisor of Banks required lenders on Dec. 31 to reduce exposure to holding companies to 25 percent of their total capital from 30 percent. Those that don’t comply have a gradual transition period to meet the regulation, according to the directive.

Banks, which have focused on large borrowers and real-estate lending, are “exposed to risks,” Banking Supervisor David Zaken said in a speech to a Tel Aviv business conference on Dec. 11. “We see the risk of credit to large borrowers as a systemic risk, as the largest borrowers from banks are generally also the largest borrowers outside the banking system.”

Menorah Mivtachim Holdings Ltd., Israel’s fifth-largest insurer by market value and a Delek Real Estate bondholder, said it is avoiding the company’s debt.

“We will not participate in offerings by Tshuva’s group until a debt settlement with Delek Real Estate is reached that is acceptable for us,” Menorah Mivtachim said in an e-mailed statement on Feb. 15 in response to questions from Bloomberg.

Delek Group, which holds 4.99 percent of Delek Real Estate, is seeking a $500 million loan with HSBC Holdings Plc to continue to develop gas sites, including the Tamar field off Israel’s coast, the company said last month.

“Investors are unlikely to rush to buy corporate debt trading at double-digit yields over concern companies may not be able to refinance debt and pay it back,” Jonathan Katz, a Jerusalem-based economist at HSBC, said by phone on March 13. “Stricter capital requirements will also make it more problematic and expensive for companies to turn over debt and raise financing as banks are less willing to lend as extensively as in the past.”

To contact the reporter on this story: Sharon Wrobel in Tel Aviv at

To contact the editor responsible for this story: Claudia Maedler at

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