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Bank of Jerusalem chairman David Blumberg was scarcely the most popular fellow on the capital market last week. He took a swipe at the financial institutionals and said they were headed for heavy losses because of wanton buying of corporate bonds. To put it mildly - the institutionals did not like it.

Actually, if anything the underwriters were even more hopping mad. A slew of companies is waiting to issue bonds, and Blumberg's caveat threatened to frighten off some potential newcomers. So the underwriters jumped to the institutionals' defense. But they were really defending themselves, since they were responsible for introducing new companies to the most serious investment scene there is.

Blumberg argued that buying the bonds was a way of extending credit, but with the institutionals having no measure of the credit risk, and no means of collecting on the debt. The institutionals depend on credit rating agencies on which to base their investment decisions, and can collect on the debt only through a trust or receiver - two not overly sophisticated mechanisms.

Blumberg's views drew snorts of derision. First, said the snorters, Blumberg has a conflict of interest, because mortgage banks - like Bank of Jerusalem - compete against the same companies for the institutionals' money. This is not even to mention his sympathizing with banks' sorry entanglement in bad credit cases in recent years. "What a chutzpah!," said a typical senior investment manager.

Second, everyone defended the institutionals' method of decision-making, buying almost exclusively bonds of first-rate companies - those with credit rating of AA or higher - with no problem paying back debt. When they do buy off lower order firms, they condition the deal on securities or tough covenants. The results speak for themselves, they said, because the institutionals almost never suffer from bonds that have failed to settle.

Now that last comment may not be quite so. Israel's payment norms are getting worse, and debt payment is getting no better. According to a report from Bank Clali, about 3-4 percent of firms that the bank accompanied on its issues, defaulted on their debts. Another 10 percent elected to restructure their debt repayments. That is in almost 15 percent of cases, the investors did not see their full money returned.

Now that is an astonishing level - but the market argues that 15 percent of the issues is not 15 percent of the funds, because each issue that failed was small and insignificant. The financial damage caused was almost negligible. But this does not lower the expected risk - because the large companies have almost exhausted their issues, so the minnows will be out on the next wave.

It also does not do away with the Achilles heel of raising funds through corporate bonds - that even if the majority are successful, there are some that get into difficulties, and these the institutionals cannot cope with.

The bonds are like non-recourse loans that banks have granted big borrowers. If the borrower is in trouble, the institutionals have no securities that they can cash in. All they can do is threaten the company with liquidation.

And maybe this was Blumberg's hidden message. He wasn't out to make bond issues easier. On the contrary, he wanted to offer banking debt collection services to the institutionals. And that's no bad thing.