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"The fourth quarter was the worst Israel has ever known, because of all these write-offs. Anybody who doesn't write down investments now is a fool. The environment isn't about to change and the current optimism is a sham."

That's a quote from Itschak Shrem, one of Israel's most experienced market players and controlling shareholder of Polar Investments.

He has a point. The fourth quarter was horrible, companies admitted to frighteningly large charges on the shrinking value of assets, the losses were tremendous and the optimism is likely to evaporate.

But he wasn't talking yesterday, or even last week. He was talking in January 2002 - a year and a quarter ago. With hindsight, 2001 may have been a horrible year, but only moderately so. It was worse than 2000, that's true, but a lot better than 2002.

Now the only question is whether 2002 really will prove to have been the worst year, or if it's only the harbinger of an even worse one to come.

A flair for extravagance

To prepare a forecast for 2003, let's start with the financial reports coming in for 2002, most of which are already in. If 2001 was the year of high-tech write-offs, 2002 was marked by writing down all the rest - investments in real estate, securities, industry, inventory, affiliated companies, and Standard 15.

Slowly but surely, Israel's managers are being forced to recognize the actual value of assets they bought, accrued and developed over the years. Company after company presented 9-digit losses in shekels. For some, it's the second year of heavy losses, for others it's a new development.

One might search far and wide for the common denominator in all these companies - high exposure to high-tech? Excessive acquisitiveness? Vulnerability to the domestic market conditions?

Actually, what they have in common is their former flair at raising massive sums of capital during the boom years. Companies borrowed hundreds of millions of shekels.

There could be plenty of reasons why Sagiel Investment, which belongs to Roy Gill and Eitan Eldar, lost NIS 190 million, and we can figure how that story will end. But one thing's sure - without the help of the banks, they couldn't get close to that achievement.

And that's the main threat hovering over 2003. The Tel Aviv Stock Exchange and entire marketplace are littered with companies and tycoons who borrowed mountains of money to buy companies and operations. Every third company listed on the TASE has a man or firm above it groaning under the debt taken to buy it.

Here are a few examples:

l Gmul Investment Company this week announced an NIS 132 million loss. It was bought two years back by the Trump family (no relation to Donald), using a massive loan taken from Bank Hapoalim.

l Vladimir Gusinsky paid most of the bill for buying a 27 percent stake in Ma'ariv Holdings five years back, using a Hapoalim loan. The company lost NIS 71 million in 2002.

l Mineral water company Mayanot Eden lost NIS 72 million for the year. It financed a spree of acquisitions of European companies using loans of hundreds of millions, also taken from Bank Hapoalim.

l The Tevel cable TV company lost NIS 605 million in 2002, on top of losing NIS 909 million in 2001. Its losses were fueled by massive loans taken over five years to expand its business, as were those of its fellow cable companies Matav Cable Systems and Golden Channels.

The great danger in 2003 is that a whole domino chain of heavily leveraged companies will founder as the banks are forced to stop ignoring their situation. That is when a wave of asset and company sales will swamp the market, at their real valuations, not the artificially inflated prices at which they were held. That is when it will transpire that even the massive writeoffs of 2001 and 2002 left all too many a company inflated with hot air.

Each quarter that the crisis persists costs the borrowers a heavy price, because of the high cost of interest. Whether you borrowed in shekels or through linked loans in the last couple of years, at today's cost of capital, the principal will swell at frightening speed while the value of your assets evaporates.

A glance at the balance sheets of the companies and, mainly, at the small print in their notes to their financial statements, shows that all too many are in violation of their covenants with the banks. The moment of truth seems to be approaching.

Barring an economic upswing this year, then neither 2001 nor 2002 will be the worst year in Israeli economic history. They will merely be the prelude to the night to come.