Eytan Avriel The Ultimate Haircut

Israel's institutional investors have lost most of the public's money they invested with the IDB group, leaving two men two fight for what's left.

Eytan Avriel
Eytan Avriel
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Eytan Avriel
Eytan Avriel

The first half of October belonged, shockingly, to the IDB group, with the value of both Discount Investment Corp.'s shares and IDB Development Corp.'s bonds rising (IDB Development doesn't have publicly traded shares, just bonds).

Is the public about to grow back the locks it lost in the financial haircut on IDB investments?

The sad answer is no. Even if all the bonds issued by the IDB group continue to appreciate in value on the securities exchange and the companies ultimately pay back the face values of their publicly traded bonds, it won’t make any difference to most of the investing public. Why? Because the investment professionals who manage most of the public's investment savings, have already sold off most of their various IDB bond holdings at a loss.

The deal has been closed, locking in the public's losses. The subsequent recovery in the value of IDB's bonds only proves how negligent and ineffective those who manage institutional investors' portfolios really are. They bought the bonds on the public's behalf at full price when they were issued and sold them at a heavy loss. Then they stood aside, watching some of the bonds, like those of IDB Development, jump dozens of percent in value as the result of a hostile takeover attempt by a foreign investor fund.

But really, the recovery of these bonds is only part of the story. While some of the companies in the middle of Nochi Dankner's business pyramid have bounced back, those at the top have not in any significant way. Even now, after several days of rising securities prices and with the positive vibe surrounding the company, IDB Holding's Series D bonds, the largest and most important bond series issued by the company in terms of total size, are being traded at only 23 agorot per bond, compared with their adjusted bond value of 124 agorot.

The adjusted value is the money IDB Holding must repay to its bond-holders upon redeeming their securities. Thus, the company's bonds are being traded at one-fifth of what they would be worth were the market sure Dankner would repay his debts. It's impossible to find a larger vote of no confidence in IDB Holding's ability to avoid bankruptcy or debt restructuring and a painful haircut for investors.

These figures mean the IDB group's parent company, through which Nochi Dankner controls his entire pyramid, will be imposing a massive haircut on its investors. Even as the company's bonds are being traded at one-fifth of their value, much of the public is selling its holdings in the company, a fact revealed at a recent meeting of representatives of IDB Holding's bondholders. The meeting was only attended by institutional investors representing 20 percent of the company's total outstanding bonds. The significance of this statistic is that 80 percent of the bonds are no longer held by the saving public, but have passed into the hands of speculators and other securities traders.

As infuriating as it may be that institutional investors have managed to fritter away the public's money by making every possible mistake, it shouldn’t surprise anyone – certainly not the economists, analysts and investment professionals employed by the various institutional investors.

Many months ago, Lucian Arye Bebchuk, a Harvard professor who serves as an advisor to the Knesset's economic concentration committee, explained that the debt restructuring arrangements in Israel are biased in favor of controlling shareholders at the expense of the public. He also said controlling shareholders to take unnecessary risks in a desperate attempt to save these agreements at any price.

"Long, confusing [economic] periods aren't healthy," said Bebchuk. "Many controlling shareholders think that maybe something good in the market will occur to save them. A period like this is not good for bondholders, for the market or for the companies. When companies are managed by controlling shareholders with negative personal capital, even his incentives aren't effective. Dankner's giant gamble on Credit Suisse shares, for example, illustrates well the risks that controlling shareholders take at the expense of their bondholders in these kinds of situations," said Bebchuk.

For anyone who isn't impressed by the academic research findings or professors' warnings, there are also the financial markets' research findings and decisions. In January, Bank Hapoalim's board of directors decided to sell a portion of IDB's debt to other investors, following a request by the Bank of Israel that it reduce its exposure to major borrowers.

To whom did Bank Hapoalim sell its debt in the deal? Here is what a senior Bank Hapoalim executive said at the time: "Because of regulation, this year more credit underwriting [activity] was undertaken, most of which was sold to institutional [investors]. It's true that that the returns in the market are better [for publicly traded bonds], but they don't have collateral or debt covenants. In practice, by the way, the deals were never completed. The debt remained in the hands of Bank Hapoalim and wasn't passed off to the public, which for a change was lucky."

The market's messiah

Looking back, the sales of the various IDB securities, orchestrated by institutional investors, began with the big haircut by IDB Holding and continued with more modest haircuts by IDB Development, Discount Investments and the non-financial sector IDB companies. Altogether, the IDB group made the largest ever haircut to investor value in the Israeli capital market and no recovery, surprise investor, reorganization, asset sale or natural gas discovery will change this fact.

But what about the minority of institutional bond investors who represent the public and have yet to sell their holdings? Is it still possible to save them from a haircut? At IDB Development, the power to answer this question rests with a young man named Jeremy Blank, who is the local director of the American hedge fund York Capital Management. Blank announced almost two weeks ago that York was purchasing 20 percent of the company's publicly traded debt and plans to force it to reorganize or attempt a hostile takeover of it. This announcement unleashed a wave of optimism that buoyed all of IDB Development's securities as well as some of the companies it has stakes in.

An even more likely savior is Yair Hamburger, the controlling shareholder of the Harel Insurance Investments & Financial Services. Unlike the controlling shareholders at other big financial groups, businessmen like Phoenix Holdings' Yitzhak Tshuva who let salaried executives handle the day-to-day work of running their companies, Hamburger is a consummate finance man. His entire reputation and family legacy is tied up with the insurance industry and managing the public's money.

Hamburger runs his companies directly. He is familiar with the minutest details of their operations and financial positions, and he knows all the rules of the game. And Hamburger, as it turns out, is in charge of the largest publicly held financial stake in IDB Holding's bonds, mainly through Harel-Pia Mutual Funds. It's a stake that places Bamburger the position to be the Jeremy Blank of the Israeli market and of IDB Holding.

The question, of course, is whether he will choose to take on this role and show everyone that the Israeli capital market also has people who are ready to stand up to the tycoons. Will Bamburger stand up to the tycoons even though they belong to the same social clubs as him, representing with full force and talent the interests of the savers who place their money in the tycoons' hands. This is a test for Israeli institutional investors and for Yair Hamburger. His choice will influence many in the market and the legacy he leaves behind.

Major IDB group shareholder and chairman Nochi Dankner.Credit: Ilan Assayag



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