The Tel Aviv District Court yesterday appointed a temporary liquidator for the Car & Go auto leasing company, after the firm, whose bonds received a blue-chip AA rating from the Maalot rating company, defaulted on its very first interest payment earlier in the day.
In response, Maalot hastily downgraded the company's bonds to D (for "default").
The company has completely shut down its operations, and the liquidator was appointed mainly to ensure that bondholders and other creditors do not start seizing cars from Car & Go's unprotected lots to protect their interests.
Car & Go, one of the country's smallest leasing firms, issued bonds less than a year ago in order to raise money. Most of the bonds were bought by provident funds and insurance companies: Funds belonging to Israel Discount Bank and Bank Yahav, for instance, bought NIS 20 million worth of bonds apiece.
To ensure that it would obtain a good rating for its issue, however, Car & Go decided not to issue the bonds directly. Instead, it used a method known as "securitization": It set up a separate firm, called a "special purpose company" (SPC), whose sole job would be to pay the bondholders their interest out of the monthly payments received from leasing customers, and it was this company that issued the bonds. Car & Go also put the Brightman Almagor accounting firm in charge of disbursing the interest payments out of a special trusteeship account into which the leasing payments received by customers were supposed to be deposited.
Thanks to this system, when Maalot rated the company, it did not examine Car & Go's own financial situation; all it looked at was the cash flow from its thousands of customers. And since, statistically, thousands of unrelated customers are unlikely to all default at once, it gave the bonds a sterling AA rating.
Yesterday, however, Brightman Almagor asked the court to appoint a liquidator, because some NIS 800,000 needed to meet that day's interest payments had not been deposited into the special account.
Market players said that, in the end, the bondholders will probably receive their interest, since they have liens on the cars, and also have priority over the banks as creditors. In the meantime, however, the matter will probably spend a long time wending its way through the courts.
One of the main questions that the liquidator, the courts and analysts will presumably be trying to answer is what caused yesterday's default: Whether it was a case of embezzlement, a one-time piece of spectacular negligence, or an incident that reflects a deeper problem with the practice of securitization in Israel.
Some analysts said that at least part of the blame appears to rest with Brightman Almagor. Car & Go gave the accounting firm responsibility for overseeing the interest payments, so the fact that the money was not transferred appears to reflect a serious failure of oversight by the accountants, they said.
Brightman Almagor said in response that it "does not comment on customers' affairs."
Maalot, for its part, quickly disclaimed responsibility. "The legal structure and the terms of the bonds, which everyone signed, state explicitly that the money must arrive - but someone didn't transfer it," said CEO Dorit Salinger. "There is no problem here of nonpayment by customers or a drop in the value of the cars."
Salinger also insisted that the effect of Car & Go's collapse would be marginal, noting that there have been no problems with the more than 30 bond series issued by other leasing companies.
But not everyone agrees with either of Salinger's contentions. One senior official involved in the affair said that in an attempt to grow rapidly, Car & Go lowered its prices to the point that it was no longer economically viable - and that created a temptation for someone in the company to take the money. That situation is something that Maalot should have noticed and reflected in its rating, he said.
"The truth is that Maalot got into a rut and treated every leasing company in the same way - perhaps without examining the situation in depth," he said.
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