Haircut - Amos Biderman - January 2012
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Companies would need court and regulator approval for debt agreements giving bondholders haircuts of more than 10%, under a bill up for ministers' discussion today.

The move is the latest attempt to protect the public as company after company states that it can't pay its debts. The Ministerial Committee for Legislation is scheduled to discuss the bill today.

It is expected to receive finance and justice ministry support.

Under the bill drafted by MKs Zahava Gal-On (Meretz) and Yitzhak Vaknin (Shas), companies looking to give creditors a haircut of more than 10% - meaning, they expect creditors to agree to get back only 90% of their money, or less - would receive court-appointed trustees.

The trustee would supervise the debt agreement process, and the final deal would need the approval of the Finance Ministry's capital markets commissioner and the Israel Securities Authority.

"This bill would end the institutionalized embezzlement from pension savers by the country's big businessmen," said Gal-On.

Since loans often take the form of corporate bonds, and bonds are frequently purchased by institutional investors such as pension funds, this means the money is coming out of the public's savings.

Institutional investors have come under fire for not standing up for their customers when approving debt agreements.

"The public has gotten used to investing its money in leveraged tycoons, who repeatedly turn out to be unable to pay back their debts. And institutional investors almost always approve requests for debt settlements, which enable controlling shareholders to roll over their debts at savers' expense," said Gal-On.

Gal-On's staff found that over the past three years, at least 53 debt agreements were signed involving bond series totaling NIS 15.8 billion. That figure equals 6% of all bond debt in Israel as of mid-2011.

Some of the more high-profile debt agreements include the one struck by Africa Israel, which reorganized NIS 8 billion in bond debt, making it the largest debt settlement in Israel's history.

Also, Zim struck a debt agreement reorganizing NIS 1.33 billion in bond debt.

Currently, 36 debt agreements are being negotiated over NIS 3.1 billion in bonds. This includes the settlement by Ilan Ben-Dov's Tao Tsuot, Yossi Maiman's Ampal and Yitzhak Tshuva's Delek Real Estate.

"The wholesale approval of debt agreements at such a large scale, at a time when the economy is expanding, shows the extent to which the market is broken and sheds light on structural failures when it comes to representing the public interest," said Gal-On.

Institutionals don't penalize borrowers whose companies don't repay their debt, she added. Not only do they not demand that the companies be liquidated or handed over to bondholders, they loan to the owners again, she said.