Bond buyers beware

S&P Maalot CEO Dorit Salinger warns that companies now raising debt are piling up future problems.

December 12, 2010 02:40
3 minute read.
Dorit Salinger

Dorit Salinger 311. (photo credit: Courtesy)


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Let’s start with the good news: In 2010 there has been a drastic reduction in the rate of company insolvencies. According to figures from international rating agency Standard & Poor’s, the insolvency rate in the United States in the first three quarters of the year was just 4 percent, compared with 11% in 2009. Furthermore, S&P predicts that the insolvency rate will continue to fall in the US, to 2% next year, or 4.5% in the worst case.

In Israel, too, there has been a marked fall in the number of companies seeking debt arrangements this year. Last year it seemed as if every week another company announced it would not honor its commitments; for example, Africa-Israel and Zim.

But this year you could count on your fingers the number of companies that have sought debt arrangements.

If everything is so good, where’s the problem? According to S&P, the improvement we are seeing is only temporary.

“All in all, most of the problems have simply been pushed back,” S&P Maalot CEO Dorit Salinger told Globes in a recent interview.

Globes: What does that mean? Salinger: “Thanks to low interest rates, the appetite for risk and the high level of liquidity in the market, companies have managed to raise money from the market and roll loans back, which simply means that the day of reckoning has been postponed.

The question is whether the current situation of a very liquid market and investor appetite for risk will continue. It is by no means certain that that is what will happen, and then companies are again liable to have problems recycling debt.”

S&P believes that the sharp fall in the rate of insolvency is not a result of real recovery in the position of the companies.

“There is no substantial improvement in the operations of companies at high risk, or real treatment of their leverage levels,” Salinger says.

The effect of the global economic crisis in Israel was felt mainly in corporate bonds. Bonds fell sharply during the crisis, and companies had to ask for debt arrangements. As a result of the crisis, the Hodek Committee was set up to set rules for institutions investing in corporate bonds.

However, despite the trauma that the Israeli market underwent, Salinger does not believe that the lessons have been learned.

“When it comes to the appetite for risk, everything that happened has been wiped from memory; people have forgotten that there was a crisis,” she says.

In Israel, as in the US and Europe, the share money raised by companies defined as high risk has grown considerably, she adds.

But we are seeing mainly middleto high-rated companies leading the offerings.

“First of all, we are currently at the height of offerings by unrated companies, amounting to 13% of money raised from January to November. The previous record, in 2006, was 12%. Apart from that, even companies that have supposedly high ratings are lower on the international rating scale, often with ratings below speculative level.”

What is your view of the bond offerings? “The offerings do not reflect the true level of the companies’ risk, and investors ought to remember that when they buy bonds, they don’t buy them for a year, and they should examine whether the risk is really correctly priced.”

Won’t the Hodek Committee improve the quality of offerings on the market? “The Hodek Committee affects only those subject to it, which means that mutual funds and nostro accounts are not affected.

The institutions, which are subject to Hodek, will indeed be more selective, but as long as the public continues to pour money into the funds, we will see a lot of unrated offerings. Clearly, a situation like this cannot continue for long, and the problem is that as soon as the trend reverses, bond prices will be hard hit, because the institutions will not be able to buy the bonds that the funds sell, since they do not meet the Hodek rules.”

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