Rating Agency Sees More Regulation and Competition

S&P Maalot predicts another challenging year as regulators bite down and banks clench their fists.

For many companies listed on the Tel Aviv Stock Exchange, 2012 was a rocky year. Regulatory changes, social protests and growing competition combined to squeeze companies in the retail and communications sectors.

Several holding companies reached the brink of default. A review prepared by the S&P Maalot credit-rating firm headed by Ronit Harel Ben-Zeev, 2013 will be another challenging year. Regulators will continue to intervene and holding companies will continue to shrink, while local banks can expect to be affected by declining profits.

Tough year for holding companies

Most holding companies on the TASE stumbled last year. Some of the giants, accustomed to trading in billions of shekels, became "zombie" firms verging on bankruptcy. For the first time directors and shareholders alike contended with dwindling confidence in the markets, loss of liquidity and anxious creditors who took measures to safeguard their money.

Yuval Torbati, an analyst at S&P Maalot, says the protests, rising competition and the economic concentration committee combined to shrink the market value of many Israeli holding companies. That in turn reduced their dividends and leverage capacity.

Torbati said only 40% of registered holding companies received the high A rating from the agency in 2012, compared to 70% in 2011. In 2011 only 7% held a B-CC rating, while 30% did in 2012. Among the big corporations that were downgraded were IDB Holding Corporation, IDB Development Corp., Discount Investment Corp., Gaon Holdings, Isralom, Kardan Israel and Kardan N.V. Torbati sees a difficult year ahead for most holding companies. Since recycling debts is not on the cards for most of them, they will have to rapidly realize assets. Many of these companies' portfolios will shrink to core assets, reducing their leverage capabilities, although these will remain substantial.

Communications dividends will return

Another key sector that underwent changes in 2012 was communications, which after many years of ineffective regulation was opened up to fierce competition. This benefited consumers but aggravated shareholders. Share values plummeted by 30%-50% over the last 12 months, a trend that according to S&P Maalot could continue.

"The increased competition had financial consequences for veteran cellphone carriers as well reducing their market share," says analyst Itai Rappel.

"However, these companies reacted quickly to the challenges, by decreasing subsidies and increasing investments and dividend payouts. Despite some stabilization in the market, surprises are still possible. Competition will continue, but the newcomers will gradually increase their rates," says Rappel. "This will enable the established companies to do well." Rappel predicts that these companies will soon have to distribute shareholder dividends due to their owners' financial straits rather than burgeoning profits.

"Shareholders will not hold out for much longer in supporting liquidity and will demand some dividend distribution," he says.

Retail and food: Competition

Established grocery and other retailers, in addition to pressure from consumers, faced rising material cost as well as stiff competition from discount chains that cut into their profits in 2012. The hardships may not be over, according to analysts Tamar Stein and Ofer Meir. They predict continuing stiff competition in the food industry, including from new players such as Mashbir 365.

Stein and Meir predict a growing market share for the smaller chains at the expense of smaller grocery stores and larger retailers. These chains will expand auxiliary services, such as selling cellphones and real estate.

Tal Brin
Tal Brin