Experts weigh in on haircuts
Proposals range from demanding tycoons put more of their own cash into indebted companies to the revival of leveraged funds.
If they want to retain control of their companies when they cannot meet their debt payments tycoons should be prepared to inject their own money in them, even if the situation is not their fault.
That is the opinion of Guy Gissin, an attorney who has played an instrumental part in arranging some of the economy's largest debt settlements on behalf of bondholders in recent years, including those for Africa-Israel Investments and now for Delek Real Estate.
"They can't insist on hiding behind a firewall, as in the United States," Gissin said.
If controlling shareholders want to play by American rules they should go all the way, he said: losing the company and having to fight to get it back.
Opening his remarks by quipping: "I was invited here as the undertaker," Gissin was speaking Wednesday at DC Finance's Going Public and Raising Capital Abroad Annual Conference, in collaboration with the Association of Publicly Traded Companies, The CFO Forum of the Manufacturers Association of Israel and the Tel Aviv Stock Exchange.
Gissin pointed out that haircuts and settlements are part and parcel of the capital market scene throughout the world.
"Saying haircuts shouldn't be allowed is a populist statement," he declared. "The question is how they are conducted and if the process holds clear logic, order, and game rules. Until recently, unfortunately, the law of the jungle applied. Private investors were genuinely frustrated, but on the other hand there was no possibility of taking the company away from the controlling owner so it was hard to get anywhere," Gissin said.
"Unlike many others, I think the Justice Ministry's Haircut Law has many good points, and isn't populist," Gissin continued, referring to the law passed in July calling for a professionally qualified supervisor appointed by the courts to oversee any debt restructuring involving changes in repayment terms, to ensure that the rights of bondholders are protected.
But Gissin stressed debt restructurings should not wait for the regulator to come manage and solve the problem.
"The capital market must find the answers," he said. "We've come to the conclusion that some type of consolidation is needed between bondholders to settle disputes between creditors and the different bond series among themselves. A common language should be reached to create a united front. The solution lies is appointing a professional representative team that doesn't just operate under the interests of this or that investment committee. This is cheaper overall and more focused."
Gissin also spoke out against owners ducking a going concern warning on their financial statements by promising to inject capital and subsequently reneging.
"When their day comes in court these owners look for legal and ethically dubious semi-legal means to keep the money from coming in. Meanwhile, people are trading in the securities based on the owner's pledge."
"Debt restructurings seem to have become a national plague," former TASE chairman Prof. Meir Heth told the forum.
He tried to calm investors by reminding the audience that downward cycles eventually end. "The important thing is to draw conclusions so as to avoid reaching a situation of facing restructuring," Heth said.
TASE Chairman Saul (Sam) Bronfeld attacked claims that weakness in the capital market is due to mounting regulation. "I know my opinion isn't very popular, but it's a gross exaggeration to say regulation is the root of the problem," he said. Damage to many companies from the crash in global banking and real estate markets are to blame, according to Bronfeld.
"Companies absorbed huge losses that brought some of them to the brink and into debt restructuring," he explained. Our only consolidation is one of the first that isn't homemade. This time we're talking about a crisis imported from the gentiles."
Yelin Lapidot Investment House joint CEO Yair Lapidot railed against charges that debt settlements have wiped out much of the public's retirement savings. 'The institutions are accused of irresponsibility, of burning up pensions, distributing the money arbitrarily and rushing to unload the goods," Lapidot said, calling these claims ridiculous.
"Compare the pension situation in Israel to the large U.S. pension funds and see how, amazingly, the results of Israeli pension funds far surmounted those of the United States, which didn't have the Hodek Committee," said Lapidot, referring to the panel that set strict rules for institutional investors.
"In the United States, however, managers are sent packing if they don't produce good results," he said.
As a solution for debt restructurings and pervasive junk bond yields Lapidot suggested bringing back government-backed leveraged funds, "but in their original format, for debt repayment and refinancing only," he said.
Leveraged funds were introduced at the height of the economic crisis to aid debt-ridden, credit-hungry Israeli companies and shore up the sagging corporate-bond sector.
The leveraged funds helped the market recover and lowered yields on bonds trading on the stock exchange, according to Lapidot. "But afterward their original purpose was changed: They became a general investment tool, and some of the investments didn't turn out very well," he said.