IEC cancels emergency bond issue on rating reduction fears - Haaretz

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Mon., October 01, 2007 ,

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IEC cancels emergency bond issue on rating reduction fears

By Avi Bar-Eli

The Israel Electric Corporation (IEC) considered an emergency bond issue two weeks ago, but backed down because it feared its bonds' credit rating might be lowered, TheMarker has learned.

The offering was to be for bonds with a duration (the weighted average maturity) of only two years, which the IEC wanted to issue immediately after the failure of a fund-raising attempt at the beginning of September.

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However, the IEC received reports that a move to issue such short-term bonds would be viewed as exceptional and might give an impression of trouble, as well as trigger a lowering of the firm's bond rating.

Instead the issue was canceled and the company decided to take steps to reduce expenditures.

"The company raises all the capital it needs to develop the electricity sector and is not dependent on the state budget," the IEC said. "The company considers from time to time its strategy for raising capital. The company publicizes its offerings after implementing them - and not on the basis of various ideas."

Every year the IEC needs to raise about $1 billion, but this year it has only succeeded in raising NIS 930 million, and at a relatively high interest rate. This is partly a result of the lowering of the IEC's bond rating at the beginning of the year by the Maalot rating agency from AAA to AA+, along with setting a negative forecast for the firm's rating.

The cutbacks will include delaying any nonessential purchases, reducing fuel inventories, delaying new contracts and reducing credit.

In addition, the IEC appointed a committee to rule on all new contracts - and whether they are really essential.

The IEC recently explained its problems in raising funds locally, saying the markets were uncertain about the changes expected at the company and in the entire electricity sector.

But others - including former CEO Uri Ben-Noon and former CFO Avner Yehudai - said the real problem was the IEC's difficult financial position, which has made investors reluctant to buy IEC bonds.

The Government Companies Authority (GCA) recently refused a request by a number of the IEC's board members to receive indemnification from the state.

A number of the company's directors had refused to yield to government pressure to make changes in the company's fund-raising prospectus. But in the end they gave in and demanded indemnification for taking such an action in case they are sued.

The cabinet turned down the request, saying there was no need to grant such indemnification for directors of state-owned companies.

However, TheMarker has learned that the GCA did not rule out such indemnification relating to decisions that will need to be made during the planned reforms in the electricity sector.

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