Risky business

Africa-Israel was victim of America’s subprime mortgage crisis. Its over leveraged investments were in the wrong place at the wrong time.

July 31, 2011 05:42
3 minute read.
American Colony in Tel Aviv

American Colony in Tel Aviv 311. (photo credit: Courtesy)


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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.

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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 investments.

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 semi-reimbursement.

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 lifeline.

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.

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