Text size

How many Israeli companies will go belly-up in 2009 as a result of the global financial meltdown?

Nobody knows, of course, and no financial prognostication organization of repute has hazarded a forecast.

But we can infer an answer to the question from a recent report from the United States rating agency Standard & Poor's - emphasis on the latter name - and it's a gloomy one.

According to an S&P report in February, in America, no less than 13.9% of all companies with a speculative-grade credit rating - that means B or less on the standard rating scale - will default on their bond repayments. The figure could even could go as high as 18.5% if the crisis escalates some more, the agency said.

According to data gathered from 1981 onwards, about 4.3% of all companies with a speculative-grade rating go bankrupt every year, on average.

The bonds of companies with a rating of between B and D are generally traded at a price reflecting a yield to maturity of 10% above those of similar-term government bonds: in other words, they are "junk bonds." Investors think there's a good chance they won't repay their debt. Conservative investors wouldn't touch them with a barge-pole: they are stuff for speculation.

What about Israel? S&P's forecast relates to the U.S. only. But the average international-scale credit rating for Israeli companies is between BB and B. That puts them into speculative territory.

In the absence of any other yardstick and by following the same principles, we can say that the default rate among Israeli companies that issued bonds, could reach between 13% and 18%.

The main factors pulling down the rating average for Israeli companies, in international terms, is the perception from the get-go that Israel is less stable than the large Western states and that Israeli companies are small by international standards.

Rating companies like S&P give two different ratings for every Israeli company: a local rating, based on a scale topped by the bonds issued by the State of Israel (which have an AAA rating for local investors), as well as an international rating intended mainly for foreign investors, which takes into account Israel's lower rating. The Tel Bond-60 index, for example, which tracks the 60 largest bond series (in monetary terms) issued on the Tel Aviv Stock Exchange, reflects an average rating of between B and BB on S&P's international scale.