U.S. Firm’s Tel Aviv Bond Issue Disappoints

Wharton Properties expected to pull giant $520 million offering.

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An ambitious plan by New York property developer Wharton Properties to raise a hefty 2 billion shekels ($520 million) through a bond issue in Tel Aviv failed to arouse much interest from investors Wednesday and will probably be pulled.

Wharton, which controls a portfolio of marquee mid-town Manhattan properties, drew no more than 300 million to 400 million shekels in orders in the institutional tranche of the issue, and it appeared that its founder and CEO, Jeff Sutton, would cancel the offering.

Wharton, the latest in a long line of U.S. and Canadian property firms to tap the Tel Aviv market, had received a relatively high AA rating from the credit rating firm Maalot. But the issue’s complicated structure put off nearly all of Israel’s major institutional investors and demand for the debt proved to be very disappointing.

Wharton controls more than 120 properties valued at $10 billion. Last week it and Aurora Capital bought the New York headquarters of Israel Discount Bank on Fifth Avenue and 42nd Street for $250 million.

The setback comes amid a wave of debt issues by U.S. property companies through the Tel Aviv Stock Exchange, most of them companies controlled by American Jews such as Sutton. All told, the companies have raised 10 billion shekels in Tel Aviv, but the Wharton flop raises questions about the ability of the Israeli investor community to absorb such large and complicated debt issue.

“In my eyes, the issue would act as a test of whether the Israeli capital market had matured and become more serious, or whether what we were seeing was just another bubble,” said a New York real estate investor, who spoke to TheMarker on condition of anonymity. “If the structure Sutton had created fails, I don’t know if its worthwhile for me to raise money in Israel and risk my reputation.”

Israeli institutions were apparently unwilling to risk such large amounts of the fund under their management, much of its pension savings, on a single giant, complicated issue. The Wharton issue exceeded the 1.5 billion shekels in orders placed for an issue by the Azrieli Group, the well-known Israeli mall developer and manager.

But the Wharton issue was characterized by twists and turns. The company altered the structure of the issue from its original form three months ago and made at least 10 amendments to the prospectus.

The issue was unusual in that its proceeds weren’t going to be used to buy real estate or companies, but to buy a mezzanine loan, or preferred stock, in assets it already controlled or in other companies.

Among the investors that opted not to subscribe were Clal insurance, Psagot, Altshuler Shaham, Analyst, Meitav Dash Provident & Pension and Excellence Provident & Pension, as did the mutual fund arms of Meitav Dash and Excellence. Harel Insurance & Finance, which has worked with Wharton to invest in New York real estate, said it was undecided.