yitzhak tshuva 311.
(photo credit: Delek group via Bloomberg)
The world economic crisis has brought cash-flow problems to businesses around
the world, and Israel’s tycoons have not been exempt.
Lev Leviev was one
of the first to seek a renegotiation with bondholders in 2009; since then the
same scenario has repeated itself with other tycoons. The latest is Delek Group
chairman Yitzhak Tshuva, who finds his company unable to pay
Tshuva is offering a repayment package that may amount to up
to a 50 percent write-down, or “haircut.”
So far this is a garden-variety
story of a struggling company striving to reach an agreement with creditors.
Typically companies in this situation are worth most as going concerns with
current management, so both sides are anxious to avoid liquidation – an outcome
that theoretically either side could precipitate. So both sides are bargaining
in the shadow of this threat while trying to get the best deal they think they
The wrinkle in the tycoon story is that a huge chunk of their bonds
are held by Israeli institutional investors, meaning your savings and mine. Thus
the battle is no longer the battle of the titans; it is more likely to be
interpreted by the public as little saver David against tycoon Goliath. This
situation certainly increases the importance that the bondholders get the best
deal they can, but at the same time it may decrease the
Millions of private Israeli savers negotiating against a
single businessman would not have the solidarity or the expertise to reach an
effective deal. The institutional investors, as a small group of financial
experts, probably do.
But the private investors have something else: the
will and personal stake to stand up for their interests, while some observers
worry that the investment funds representing them do not.
Will they give
up sleepless nights and endless pressured negotiating sessions for OPM – other
people’s money? Under the current compensation model, they receive their fixed
management fees rain or shine, so there is not much of a financial incentive to
really to go bat for the citizen’s retirement savings.
MK Meir Sheetrit
thinks the Knesset should intervene, and perhaps he is right. But the solution
he is proposing is a punitive, not a constructive one. He suggests closing off
the capital markets to businessmen who have reneged on their obligations to the
Such punitive restrictions used to be common in bankruptcy law;
some countries still won’t let a person run a company if a previous company he
headed went bankrupt. But current thinking is that sometimes the most talented
people with the best ideas go bankrupt, as any business endeavor is fraught with
Merav Arlozorov of Haaretz suggests changing the compensation model
for fund managers.
She provides a few promising examples. For instance,
what would happen if management fees were a fraction of long-term profits? A few
hits from inept negotiations with tycoons could leave a manager with nothing to
show for years at his or her desk.
I don’t have any specific complaints
about the way the institutional investors have represented their clients, and I
certainly hope they will be bold and tough negotiators to reach the best
possible deal. But I do feel the current system doesn’t provide the right
incentives, and Israeli savers deserves a system that puts their interests first
in negotiations with tycoons, without being vindictive toward entrepreneurs who
create the wealth in the first firstname.lastname@example.org Asher Meir
is research director at the Business Ethics Center of Jerusalem, an independent
institute in the Jerusalem College of Technology (Machon Lev).