Bank Hapoalim may have to make provisions of tens of millions of shekels for doubtful debt in the first quarter 2002, because the bank's controlling shareholders have overstepped the credit ceiling set by the Bank of Israel on loans to controlling shareholders. In 2000, the bank's provisions for doubtful debt for loans that exceed the ceiling set on loans to controlling shareholders totaled NIS 70 million.

The possible first quarter provision results from an order issued by the Supervisor of Banks to Bank Hapoalim to reduce debts of persons connected to the control of the bank to NIS 1.6 billion by the end of February 2002. In recent months, the bank's controlling shareholders have taken a number of steps to reduce their debt to below the credit ceiling, but they have not yet managed to cut their debt significantly.

One of the factors contributing to the controlling shareholders' debt is a half a billion shekel loan extended to Partner Communications, which is scheduled to expire at the end of the month. Because of difficulties in finding financing solutions within the local banking system, Partner is currently examining ways to exchange the loan with credit from foreign banks.

Among Partner's shareholders are the cable television company Matav Cable Systems Media (which is held by the Dankner family) and Eurocom Communications, which is 51 percent held by the Arison family. Both the Dankner family and the Arison family are among the controlling shareholders in Bank Hapoalim.

Eurocom holds a 9.8 percent share in Partner, while Matav has a 15 percent share. According to Bank of Israel regulations a connected company is a company in which the controlling shareholders in the bank hold a 10 percent share. In recent months, the Dankner group has examined ways of reducing its holding in Matav to under 10 percent so that loans taken by Partner would not be subject to credit limitations on persons connected to the bank.

Another option being considered by Partner is a public offering that would enable the company to use the proceeds to repay its debt to the bank. Partner, which trades on the Nasdaq and the London and Tel Aviv stock exchanges, has presented a draft prospectus to the United States Securities and Exchange Commission for a $400 million future offering. However, analysts believe that the company will find it difficult to complete the offering in the coming weeks.

Even if Partner reaches an arrangement enabling it to repay its debt during February, loans extended to controlling shareholders in Bank Hapoalim will still exceed credit limitations.

The bank is hoping that the Supervisor of Banks will soon pass a proposed amendment to the regulations governing the credit ceiling on loans to controlling shareholders. The central bank is planning to increase the credit ceiling that banks are allowed to extend to controlling shareholders from 10 percent to 15 percent. If this amendment is passed, NIS 800 million in loans that exceed the credit ceiling will become "kosher" and the bank will no longer have to make provisions for doubtful debt for those sums.

If the amendment is passed and Partner repays its debt, Bank Hapoalim will have to make provisions of only NIS 20 million. If Partner does not reach an arrangement for its debt and the Bank of Israel does not change its regulations, then Bank Hapoalim will have to make a provision of NIS 80-90 million.