Lawyers and underwriters for insurance company Menorah, which held a 200 million shekel bond issue on Sunday, were shocked when they opened the bidder envelopes and found a highly unusual offer. The bidder, a member of the securities exchange, sought to acquire Menorah bonds for itself and its customers totaling a decillion shekels.
The underwriters from Clal Finance Batucha "googled" the word decillion and learned that it means 10 to the power of 33. In other words, the bidder sought to acquire bonds equal to 10 to the power of 21 times the value of all the assets in Israel, which equal NIS 1.9 trillion.
The bidder was aware, of course, that only NIS 200 million worth of bonds were for sale. The investor wanted to make sure it would win all that it could. Because half the issue was limited to institutional investors, the bidder successfully ensured that it would acquire the balance.
The bidder took advantage of two failings in the existing method of public issues.
One is that there is no pricing, and bidding is only based on quantity. Therefore, at the maximum price offered, investors can enter huge bids to try to obtain a large portion of an issue. The phenomenon has been well known in the capital market for years. An order of a decillion, however, is a new record.
The second failing is that bids are only on paper. A bidder is not required to secure a loan of a decillion shekels to make such a bid, only submit a piece of paper with a number.
The prospectus' publishers also contributed to the fiasco, forgetting to limit the size of allowable orders. One investor noticed the oversight and seized the opportunity to make the huge order.
Aside from the other investors, a big loser is the Israeli capital market, seen by some observers as a market where absurd things can happen. The Israel Securities Authority is aware of this, and a new underwriting law that comes into effect in July is expected to prevent bidders from submitting inflated orders in auctions where prices are not limited.
The Israel Securities Authority also said that if necessary, to prevent inflated bids, it will consider limiting the maximum order to twice the size of the issue.
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