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Bank of Israel Supervisor of Banks Yoav Lehman recently rejected requests from the banking sector not to include loans to power stations as credit to Israel Electric Corporation when calculating limitations on lending to a single borrower.

The regulation forbids a bank from granting credit to a single borrower that exceeds 15 percent of the bank's equity.

IEC is already very close to the limit at a number of banks and its ability to receive new bank credit is constricted. The supervisor has now decided that lending to projects with IEC involvement, like the construction of power stations, will be considered for this regulation, which the banks believe will prevent them from financing the ventures.

The problematic projects include power stations in various stages of planning and construction at Ramat Hovav, Alon Tavor and on the Rotem Plain. In addition, the Tethys Sea gas exploration project, in which IEC could be involved, would be included.

Bank of Israel explains the policy, noting that IEC is the primary, essentially sole, consumer of electricity produced by the ventures. Therefore, the ventures repayment capability and cash flow are entirely contingent on IEC.

In the past, Bank of Israel agreed not to include the Ramat Hovav and Alon Tavor stations in IEC's single-borrower calculations. The bank recently revoked that permission, in part due to a deterioration in IEC's financial situation.

This resulted in credit rating agency Moody's reducing the company's rating two stages in January. Moody's explained that the reduction stemmed from the company's high level of debt and its weak financial profile, which had substantially worsened. Moody's even estimated IEC's credit rating could fall another grade.

This changed Bank of Israel's attitude to IEC as a borrower, no longer considering the electricity monopoly to be as stable financially as the government, as it once did. IEC now has about NIS 15 billion in bank credit.

The banking sector argues that the banking supervisor's position will increase the difficulties that electricity ventures face in finding financing and could even torpedo projects completely. IEC is slated to be involved in or the major client for $1 billion in such projects.

These include the Tethys Sea natural gas project, in which investment in construction and production had been estimated by the banks at $510 million. Assuming 20 percent of the project is to be financed using equity, the banks would still need to lend substantial sums to the venture.

Also, the scheduled construction of a natural gas pipeline would be affected, as IEC will have trouble raising the estimated $400 million for that project ($100 million for its earliest stages).

The construction of private power stations, primarily the plan at Ramat Hovav valued at $210 million and the Rotem Plain power station in which $200 million is expected to be invested, will also be affected.

IEC's single-borrower limitation was one of the reasons the Ofer brothers decided not to construct the Ramat Hovav power station, due to financing problems created by Lehman's decision.

Bank of Israel sources say that electricity sector credit cannot be untangled by loading surplus risk on the banking sector. IEC and the Tethys Sea venture refused to comment for this report.