Securities Authority Signals Concern About U.S. Bond Issuers

Rating agencies point out growing risks in Israeli corporate bond market.

Eran Azran
Asa Sasson
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Stock prices flash on an electronic screen displaying world clocks at the Tel Aviv Stock Exchange (TASE) in Tel Aviv, Israel, on Thursday, Dec. 11, 2014.
Stock prices flash on an electronic screen displaying world clocks at the Tel Aviv Stock Exchange (TASE) in Tel Aviv, Israel, on Thursday, Dec. 11, 2014.Credit: Bloomberg
Eran Azran
Asa Sasson

The wave of bond offerings by United States real-estate companies in Israel has begun to worry the Israel Securities Authority.

“We are alert to the extent of corporate bond issues and their characteristics, and we are naturally examining to see if it requires regulatory intervention and if so how, for example in relation to corporate bond issues by foreign companies,” Galit Cohen, director of public inquiries, said in a letter.

Cohen was responding to concerns raised by Amiram Gil, who heads the Capital Markets Clinic, a research center affiliated with the Ramat Gan College of Law and Business, which conducted a study showing growing risks in the Israeli corporate bond market.

Among other things, the markets clinic found that the level and quality of collateral used to back bonds had declined since the end of 2013.

Not only the clinic, the Bank of Israel, state comptroller and the two bond-rating agencies – S&P Maalot and Midroog – have detected the same trend and have pointed out the underpricing of debt as expressed in interest rates.

That has been especially the case for American real-estate companies issuing bonds in Israel, where they would have to pay higher rates of interest. Critics have also expressed concern that bondholders would be able to recover distressed debt because the companies’ assets are overseas.

Some 3.5 billion shekels ($870 million) of bonds were sold for trading on the Tel Aviv Stock Exchange, most of it last year, by U.S. property companies, the biggest being a 1 billion-shekel issue by Extell Limited. Among other major issues, Lightstone Group raised 478 million and All Year Holdings 398 million shekels. The New York real-estate firm Moinian Group, controlled by Joseph Moinian, is considering a 1 billion-shekel issue this spring.

TheMarker has learned that Altshuler Shaham, one of the major investment houses to have refrained from investing in U.S. property bonds, has reconsidered. “The matter was carefully examined and it was decided to consider each [issue] on its own merits,” a spokesman said.

Altshuler Shaham had been concerned about the risk in the bond, in particular because the coupons they carried were too low relative to the risk and because the issuing companies are typically registered in the U.S. Virgin islands, which would creates difficulties in the event of a default.

In its letter, the clinic said the ISA should be imposing the same standards for bond-investment policies on mutual funds as it does on other institutional investors and reissue its 2011 guidelines on how mutual funds should avoid underpricing interest rates on the bonds they buy.

But the ISA rejected the proposal, saying its intervention should not extend beyond vetting the terms of a public offering. Once the ISA has approved a prospectus, the securities are sold and traded, and it is up to the fund managers to decide what to invest in.

“Fund management is by its nature the exercising of professional judgment in which regulators need to limit their intervention,” it said.

The ISA also warned that excessive regulation was not in the public’s interest. It said that “excessive demands and the creation of a single standard” for all classes of investors would reduce diversity in the marketplace and make it difficult for companies to raise money in the capital market, risking a credit crunch, especially for small- and medium-sized companies.

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