Zelekha Could Wreck Financing for Car Fleets, Says Shmeltzer

Shlomo Shmeltzer, owner of the Shlomo Sixt car rental agency, has read the writing on the wall: The Zelekha Committee's recommendations for increasing competition in the car industry threaten the highly-leveraged leasing fleets.

Limits on the size of leasing companies, for example, could reduce the size of fleets that firms could put up as security in bond flotations.

So before it was too late, Shlomo Sixt's parent company, S. Shlomo Holdings, announced Sunday it was considering raising another NIS 200 million by extending its B10 bond series.

The Zelekha Committee, formed in August and headed by the Finance Ministry's outspoken former accountant-general, Yaron Zelekha, is expected to release its final recommendations within weeks. The committee is examining the competitiveness of Israel's automotive industry, with an emphasis on reducing concentration among vehicle importers and lowering consumer prices for cars and replacement parts. The committee is also tackling issues like cross-ownership between vehicle importers and leasing companies, and the reduction of car servicing and repair costs.

The committee's recommendations, beyond promising clear benefits to consumers, are likely to shake up the entire car industry, especially the leasing sector. The three leasing companies with securities traded on the Tel Aviv Stock Exchange - Shlomo Holdings, Albar Mimunit Services and Kardan Vehicle - have a total of NIS 3 billion bonds outstanding.

Shlomo Holdings, whose Shlomo Sixt controls 27.5% of the market, owes almost NIS 1.3 billion on its bonds. Albar and Kardan, each with a 12.5% market share, have about NIS 1.3 billion and NIS 700 million in bond debt respectively. Albar's shares also serve as security for NIS 213 million in bonds of its parent company, Elezra Holdings. The yield on this series is currently 17%.

The level of security backing leasing-company bonds is worrisome, particularly if the Zelekha Committee recommendations are put into force. More Investment House found that 80% of Shlomo Holdings and Albar bonds are backed by their car fleets, while the remaining bonds aren't secured at all.

The trusty Levi Itzhak price manual

The rental car fleets are valued according to the Levi Itzhak monthly used-car price guide; this helps calculate the security provided on bonds. But the Zelekha Committee will probably recommend supplanting the Levi Itzhak manual with a new government-issued guide.

This wouldn't affect the fleet values in existing bond covenants but could reduce their real values. In this case, the leasing companies could have a hard time refinancing their debt and, if insolvency struck, the true value of the liens could turn out to be much less than the book values.

"Leasing companies rely heavily on their ability to refinance old debts or issue new series backed by collateral," says Tzahi Kalmin, More's investment and research manager. "The Zelekha Committee recommendations submitted for government approval could substantially affect the leasing companies' ability to refinance their debts."

Limiting the size of leasing companies is the most far-reaching recommendation, according to Kalmin. This, he says, could reduce the size of fleets that a company could put up as security in bond flotations, and would reduce bond issuances for refinance existing debt. In addition, tax changes and price controls would cut into the industry's profitability.

"Experience from the past year shows that the regulator has a strong ambition to enact reforms and major changes," says Kalmin. "It's hard to anticipate which recommendations will be passed by the Knesset and which ones won't go any further, but industry uncertainty demands a reduction in bond-portfolio exposure to the automotive sector, especially to the leasing companies." Kalmin thinks the recommendations will have a profound effect on the leasing industry and that credit ratings might be downgraded shortly.

Surge in returns?

"The leasing industry is currently exposed to several threats," says Dori Resnick, research department manager at Bank Leumi's capital markets division. "The industry is highly leveraged, with heavy financing needs. The problem currently taking shape in the domestic credit market - regarding the banks as well as the capital market - could be a decisive factor for the sector." The threat to the leasing industry from the Zelekha Committee exists, but is less critical, he says.

"The effect of the Zelekha Committee on the leasing companies' abilities to roll over their debt can't be ignored, but this will mainly affect new bond issues," says Resnick. "In leasing, raising funds is usually done back to back with closing a deal. So the leasing companies ostensibly have the privilege of simply not raising money and not pursuing new deals. In 2008 deals were dropped because there was no funding for the vehicles."

Resnick feels that the greatest risk to existing bond series comes from customer demand. "It could definitely pose a problem if we see a wave of cars being returned to the companies," he says. "In such an extreme case, if the cost of rolling over debt is too high and there's a need to use collateral, the trustee appointed to the company will get a fleet of cars ... under pressure. But this is still better than nothing."

It isn't clear whether car returns will really swamp the leasing companies. Similar scenarios were raised in 2008, but the firms weathered the crisis relatively unharmed.

This week, though, it was revealed that Harel Insurance Investments & Financial Services offered its employees an extra NIS 4,000 in gross salary for returning their leased cars. Rising usage rates for company cars and gasoline prices might not have induced organizations to cancel their leasing contracts, but they've certainly weakened any appetite for new contracts.

So far it seems investors are confident this won't affect the leasing companies' abilities to service their debts, but the Zelekha Committee recommendations could change all that.