American Colony in Tel Aviv 311.
(photo credit: Courtesy)
When the world still reeled from the paralyzing credit crunch of 2008/9, some of our homegrown tycoons, such as Africa-Israel’s Lev Leviev, encountered difficulty in refinancing debts and reimbursing bondholders. Those were quite extraordinary circumstances. Africa-Israel was a classic victim of America’s subprime mortgage crisis. Its over leveraged investments were lucklessly in the wrong place at the wrong time.
In the years since, no such shocks have afflicted our bond market. This was exceptional good news because most Israeli households, perhaps unbeknownst to them, have a stake in that market’s welfare. This includes anyone with long-range investments via mutual (ne’emanut) funds or anyone whose pay-slip shows deductions for pension funds, provident (gemel) funds or educational (hishtalmut) funds.
But of late, more tycoons are disturbing Israel’s marketplace peace, this time without extraordinary global circumstances to account for their attempts to postpone payments or otherwise restructure their debt.
This is particularly worrisome.
For instance, Ilan Ben-Dov, controlling shareholder of the Tao Tsuot
investment consortium – which through its subsidiaries controls, among
others, the Partner cellphone provider – has proposed a debt settlement
that is popularly dubbed “the 60 percent haircut.”
Via a convoluted maneuver, justified as “better than nothing,” Ben-Dov
has basically offered bondholders, by way of only partial restitution,
stock in the subsidiary that controls Partner. He reportedly was taken
aback by the resentment this engendered.
Delek Real Estate, controlled by Yitzhak Tshuva, has requested a
five-month deferral on payments to its series B25 bondholders. This too
has raised a howl of protest, accompanied by strident demands that
Tshuva inject money and assets into the firm from his many holdings.
Things are complicated by the fact that the conglomerate has other
series of bonds and that some bondholders now demand higher interest,
collateral and only partial rescheduling of debt.
All this is more sensitive than the uninitiated might suppose, because
most bonds are judged as relatively less-risky, more conservative
A bond essentially is a loan that the borrower undertakes to repay with
interest after a defined term, or maturity. A bondholder is a given
company’s creditor while a stock owner buys a share of the company.
Therefore, offering, as Ben-Dov does, stocks in lieu of part of the
bond-debt means a whopping loss to bondholders as well as a more risky
The law doesn’t oblige either Ben-Dov or Tshuva – or other debtors who
potentially wait in the wings – to redeem bonds with their private
wealth. Yet despite the reality of limited liability, some tycoons do
personally stand behind their obligations, as a matter of principle.
Just recently Shari Arison put up half-a-billion shekels in security to Arison Holdings’ bondholders.
Besides ethics, there is business sense in such good conduct. It’s a
major confidence-builder. Investors are encouraged when the power behind
the conglomerate unstintingly supports it.
Conversely, bad behavior paints the tycoons as greedy exploiters who
cannot be trusted. Lack of trust is the crucial catalyst of a credit
crunch. If ma-and-pa investors fear that they are being fleeced, they’ll
keep their savings out of circulation and out of financial exchanges.
The economy won’t receive the capital transfusions on which it thrives, a
situation that could cause liquidity problems and even layoffs.
Investor jitters are foremost on the list of what any government should
strive hard to avoid, especially considering the worldwide near-calamity
of just a few years ago. This doesn’t mean bailouts.
There’s no underestimating the paramount importance of not signaling to
cash-strapped enterprises that they needn’t try too earnestly to make
good on their obligations because the government will be there with a
The answer may reside in a bill submitted by MKs Carmel Shama-Hacohen
(Likud) and Shelly Yacimovich (Labor) that would prohibit corporations
from floating any bond issues for two years post-default.
Fundamentally, Israel needs more stringent regulation to protect
investors so that the economy can keep going. As recent American and
European examples show, even die hard capitalists understand that there
must be a sane balance between intervention and laissez faire.
Too little supervision is as harmful as too much supervision.
Moderate regulation doesn’t contradict free enterprise. It bolsters it.