Treasury to set up debt recycling funds

Measure will help companies cope with ongoing credit crunch.

By SHARON WROBEL
January 1, 2009 23:10
2 minute read.
Treasury to set up debt recycling funds

Ronnie Bar On 88 248. (photo credit: Ariel Jerozolimski)

The Finance Ministry is jump-starting the establishment of debt-recycling investment funds in a joint government-private initiative aimed at easing the credit crisis in the non-banking sector and the market failure in the corporate bond market. "The non-banking credit sector has come to a near halt, while the banking sector is not giving out loans to the private business sector. This market failure is causing a crisis in the credit market and is weighing on the ability of corporations to return debt," said Ram Belinkov, the Finance Ministry's Budget Supervisor at the presentation of the structure of the funds in Tel Aviv on Thursday. Over the next two years, corporate bonds with values of billions of shekels are due to mature. However, sources for raising new financing for institutional bodies in the private sector have come to a near standstill, while medium and large companies are facing great difficulties in raising additional credit lines from the non-banking sector to cover current commitments and recycle debt amid a global recession and a slowdown in the Israeli economy. "The combination of all these factors is increasing the likelihood that quality companies will not be able to meet their commitments and recycle or refinance their debt," said the Treasury. "Therefore, intervention is needed to provide the tools needed to deal with the current market failure." "One of the solutions involves the allocation of resources for recycling debt of "good" companies which are in need of it and to arrange credit frameworks for those companies." For this purpose the Finance Ministry is setting up joint investment funds with the private sector to recycle some of the corporate debt, while sharing most of the risk. The Ministry will establish a number of debt recycling funds together with investment institutions for which a total of NIS 5 billion has been allocated. The funds will invest in Israeli companies which generate at least 50 percent of their revenues in Israel and have at least 50% of their assets in Israel. Fund managers attending the conference welcomed the plan but criticized that the government was streaming money into the economy at the taxpayer's expense without providing a mechanism which ensures that only "good" companies will benefit. The Ministry is operating under a very tight time frame for the tender process of the first two funds, which are aimed at providing more credit to corporations, aiming to have them operational starting next week. In the first debt-recycling fund, the government will invest NIS 600 million and in the second it is expected to invest up to NIS 400m., while sharing most of the risk. The idea is that participating investment institutions such as pension and provident funds will leverage the government's money in order to expand the overall size of the funds available. According to the structure, each fund will be allowed to invest up to 10% of its principle in a single company, or up to 15% in a group. The funds will have a minimum return of 4%, and the government will split the profits. Activity of the fund investments is limited to three years with the option of up to three 1-year extensions. The funds will be incorporated as limited partnerships. The fund manager will be selected in an upcoming tender. The winner of the tender will be the one who can organize the largest possible investment commitments from the other investors. The fund manager will receive a management fee which consists of 0.8% of the total commitments of the fund during the investment period. The fund manager will be the general partner, and the government and other investment institutions will be the limited partners.


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