Huge Chunk of Israeli Stocks Carry Going-concern Warning

Out of all the companies listed on the Tel Aviv Stock Exchange, one-third are considered financially unsound and a very risky buy.

One of every three companies listed on the Tel Aviv Stock Exchange carries a going-concern warning or an auditor's note attesting to shaky financial condition, Shmuel Hauser, chairman of the Israel Securities Authority, said on Tuesday.

In other words, roughly one-third of the companies are likely to face cash flow troubles, and soon.

The numbers, Hauser says, point to a downturn in the financial health of Israeli companies.

In December 2008 one in every 13 companies, or a total of 51, carried a going-concern warning. Now the number is one in seven, totaling 89 companies. That's an increase of 74 percent.

A going-concern warning issued by an auditor is attached to the financial reports of struggling companies. It's a bad sign about the company's future, and casts doubt on its future viability. Auditors may also write a note in the financial report calling investors’ attention to the company’s situation. Although this note is less severe than a going-concern warning, its purpose is to hint at future difficulties such as debt-servicing problems, for example.

“Unfortunately, the global financial crisis that started in 2008 hasn’t ended yet, and it’s still showing its presence in the Israeli capital market,” Hauser said. “As a result, many public companies and companies that issue bonds have fallen into financial difficulty over the past four years. Some of them reached debt arrangements while others, still in operation, fear for their future as a going concern or labor under uncertainty regarding their financial situation.”

Two prominent companies that carry a going-concern warning in their reports are IDB Holding Corp., controlled by Nochi Dankner, and the Habas construction group.

As far as investors are concerned, a going-concern warning signals that a company is likely to default on bond debt - deliver a haircut, in market argot. In other words, they lent money to the company by buying its bonds are aren't likely to get their money back in full, or possibly at all. Several major Israeli business groups have delivered stinging haircuts to investors in the last few years, including Lev Leviev's Africa Israel, and more recently, Moti Zisser's Elbit Imaging as well.

Uzi Tzur
Ariel Shalit