Dog days for the debt market as new bond issues sink in August
Total amount barely passed the NIS 1 billion mark, a worrying sign that companies face trouble rolling over debt in 2013-14.
New debt issues nearly vanished in August, hitting a low for the year to date in both size and volume.
There were just two public offerings, both by financial institutions: Union Bank of Israel and Dexia Israel Bank raised a combined NIS 842 million, according to figures are from credit rating agency S&P Maalot's monthly report on debt issuance. Six private issues, restricted to financial institutions, raised just NIS 215 million combined, Maalot said.
"The dramatic drop in issues during the month, especially in the latter half, was due to general market weakness and the release of financial statements toward the end of the month,"Ranen Cohen-Orgad, CEO at Leader Underwriters, said.
He noted that companies cannot raise funds prior to publishing their quarterly financial reports.
"Trading volumes on stocks and bonds during the period were also terribly thin, also making it difficult to raise money in the primary market," Cohen-Orgad added.
S&P Maalot CEO Ronit Harel Ben-Zeev looked to a broader context to explain the situation.
"Uncertainty in Israel and around the world, high bond yields, a deterioration in the business condition of many companies as indicated in their second-quarter financials as well as concerns over additional debt settlements have exacerbated the negative mood among institutional investors and continue to depress activity in the corporate bond market," she said.
She also cited a "stagnant" primary market during August, which she said indicates "further hardship for the capital market.
Wave of redemptions
"The lack of activity in August also stood out in comparison to previous years. The situation is even more worrying considering the redemptions expected in 2013 and 2014, along with companies' limited ability to refinance their debt in light of credit reductions in the banking system and mounting difficulty in issuing public bonds," said Harel Ben-Zeev.
High yields in the secondary market also contributed to the dip in issues.
No fewer than 120 companies, mainly in the financial, real estate and communication sectors - which comprise 46% of all companies with bonds trading on the market - have at least one series trading at a yield of over 10%. One third of these companies have completed or are seeking a debt settlement.
Companies with bonds trading at yields of more than 8% face a serious obstacle in raising more debt in the market due to high financing costs: They would need to offer a coupon at the same rate, or even higher, to entice investors, who canachieve the same return on the secondary market. Without being able to roll over their debt, such companies could easily run into refinancing and cash-flow problems.
"The current level of yields continues to saddle a growing portion of companies in recycling their debt," said Harel Ben-Zeev. "Even companies with relatively high credit quality will face refinancing challenges due to harsh market conditions."
Cohen-Orgad said current market conditions demand "creativity and professionalism" to match companies' capital and debt raising needs to the desire of investors for lower risk levels than in the past."
Deterred by high yields from further bond issues, companies had increasingly turned to institutional investors, like pension and provident funds and insurance companies, for private loans, but the trend has begun to slow. S&P Maalot, based on Finance Ministry and Bank of Israel data, estimates that net loans taken in the first seven months of the year totaled NIS 4.5 billion, compared to NIS 7.2 billion in all of 2011, for a 10% increase in the annual rate after more than doubling between 2010 and 2011. Private loans taken this year represent 24% of the scope of bond issues this year, compared to 12% in 2010.
Despite the near freeze in the market during August, the rate of bond issues for the year to date is on part with 2011, at NIS 3.2 billion to NIS 3.3 billion a month, NIS 27 billion total so far in 2012. All but NIS 1.2 billion of this was issued to companies with A credit ratings.
Excluding bonds issued by Israel Electric Corp. and the financial sector, the real estate sector topped the borrowing table with 49% of funds raised - NIS 7 billion so far this year, compared to NIS 7.5 billion in all of 2011.
"We judge that the volume of public bond issues in the coming months will continue to be significantly lower than in the first months of 2012," Harel Ben-Zeev said, adding, "High refinancing needs and difficulties issuing bonds to this end will lead to more asset realizations and selloffs. If these measures aren't successful, more companies will find themselves in a debt settlement."