Corporate bond issues 2012
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After two months of mild recovery in the domestic non-bank credit market, the crisis in the euro zone and the drop in global markets finally brought a sharp slowdown in new bond issues last month.

The value of new issues of traded bonds plunged 60% in May, to about NIS 2 billion, compared with NIS 4.7 billion in April. The month also saw a significant drop in prices and a rise in yields in the traded market.

According to the Maalot bond rating agency, under the management of Ronit Harel, most of the new issues made in May were, in fact, completed in the first half of the month before Europe's financial woes became a full-fledged crisis that drove global markets lower.

The value of new-bond issues remains higher so far this year than the same time in 2011. But Harel signaled that the situation is growing more difficult for borrowers.

"The increasing uncertainty and the [high level of] yields is having a negative impact on the pace of new issues expected over the next few weeks," said Harel. "Investor selectivity is dictating that most new issues will continue to be done by the most highly-rated companies while risk premiums are likely to be relatively higher than we've seen in the last few months."

In contrast to previous months, it was real estate companies that led the list of new issuers as they turned to the non-bank credit market in the face of an increasingly tougher market for bank loans. Property companies accounted for 27% of all new issues in the first five months of the year, compared with 18% in 2011.

On the other hand, the financial sector was notable for its absence, raising just NIS 22 billion in fresh bond issues. Nevertheless, since the start of the year it has accounted for 37% of all new issues.

Given the increasingly uncertain atmosphere in global financial markets - an echo of the situation that characterized the second half of 2011 - it was the biggest and most credit-worthy borrowers that tapped the bond market last month.

Approximately two-thirds of all the fundraising during May was done by companies with an AA rating or better. Another 30% of the issuers had at least an A rating while those with a BBB tag accounted for a meager 4% of the issues.

Meanwhile, yields on traded bonds turned higher, reversing a trend in the previous four months. Whereas the portion of bonds trading at a yield of 8% or more had trended lower to 29% in May from 42% at the start of 2012, in May it rose to 37%.

Maalot said in a study it conducted of 100 companies it rates, 12% were categorized as having "weak" liquidity and 30% as being less liquid than they should be.

The 8% benchmark is critical because corporate issuers whose bonds are yields in excess of that are effectively barred from raising fresh capital. The reason is that the cost of capital at that level is too high for most borrowers to bear. But that means those borrowers will not be able to roll over debt and could find themselves in a cash crisis.