Consulting and underwriting firms expect a slowdown in public offerings in the third quarter under current global market conditions of high interest rates and uncertainty given the sub-prime mortgage crisis in the US.
"Although the local market is not expected to be directly affected by the sub-prime mortgage crisis in the US, we are seeing fewer public offerings and closings over the past few months since we are part of the global village," Danny Margalit, managing partner at the BDO Ziv Haft accounting and consulting firm told The Jerusalem Post on the sidelines of the annual public offerings conference organized by the Public Companies Union and D.C. Finance. "In the first two quarters of the year we saw 50 public offerings, while in the third quarter we expect a slowdown with only five offerings to close. In the fourth quarter, we might see signs of recovery with 10 to 15 offerings."
Margalit didn't expect this vacuum to stay around for long; he expects Israeli companies will look to alternative markets in Hong Kong and China to raise money.
"Risks are lower in the Asian markets and yields are high, regulation is more convenient there and the accounting standards are international ones," said Margalit.
Adding to local worries, according to Gil Gazit, CEO of the Midroog credit rating agency, was the Heftsiba effect, which created negative sentiment, particularly for real estate companies.
"The Heftsiba collapse has had a psychological effect on the market in an environment of high interest rates and high pricing for bonds," said Gazit. "Many companies put a halt on preparing prospectuses for offerings or make shelf offerings to be used when market conditions are more favorable."
Gazit added that there were 80 bodies in the primary bond market, which issued bonds without credit ratings at a volume of NIS 6b.
"Some of these companies could be granted a speculative credit rating of 'Ba' and others would not get an investment grading at all and most probably they will not be able to return debt to investors," he said. Credit rating agencies such as Midroog evaluate these securities and grant each one a "rating" or "grade," which reflects the probability of bankruptcy and nonpayment. An asset that receives a "AAA" rating is considered all but completely safe from bankruptcy, while "BBB" indicates that there is some probability of default on debt.
From January to July 2007, NIS 58 billion of non-banking credit was issued by the Israeli bond markets, compared with NIS 47b. for all 2006 and NIS 12b. in 2003, Gazit said. "Our estimates are that a total of NIS 75b. of non-banking credit will be issued in the full year of 2007, unless we experience another company collapse [such as Heftsiba]."
Also speaking at the conference, Zachi Sultan, general manager of Clal Underwriting said the local market has been experiencing a breakthrough in non-banking credit financing in recent months in comparison with previous years.
"I remember at least two large offerings at a volume of over NIS 2b. in one day," Sultan noted.