When the first U.S. real estate companies started coming to the Tel Aviv Stock Exchange a decade ago to issue debt, it looked like a win-win for everyone. The companies, most of them focused on the New York market, could borrow more cheaply than in the United States, and Israeli investors could get a piece of a hot property market.
But recent months have seen Israeli investors turn sour on the American companies, and this week the feeling was downright poisonous.
The TASE’s Tel-Bond Global index, which groups the 35 foreign property companies, has fallen 10% this year, an exceptionally steep drop for a bond index. This week alone the index has shed 2.4% even after posting a gain on Wednesday.
Of the 27 billion shekels ($7.2 billion) in bond debt the companies have raised, some 10 billion of it is trading at junk yields of 10% or more. Another 4 billion is trading at between 6% and 9%.
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“It seems the capital market has lost faith in the American bonds and anyone who can is trying to dispose of them indiscriminately,” said one institutional investment manager who asked not to be named. “The big test will come when it’s time to make repayments; then we’ll see who can keep their heads above water.”
The latest blow emerged this week amid renewed concerns about corporate governance at the real estate companies.
All Year Holdings, which has raised 2.4 billion shekels in four bond issues, said that in the second quarter the company had inadvertently transferred $3.7 million to an entity controlled by controlling shareholder Yoel Goldman.
Goldman returned the money, All Year said, but the affair left investors wondering about corporate governance in the sector.
That worry was compounded by the fact that a similar incident occurred at Chosen Properties, where $2.5 million was accidentally transferred to controlling shareholder Moshe Orlinsky. Chosen has since said its board has adopted safeguards to ensure that an incident like that won’t happen again.
But the problems of the U.S. real estate companies have been building for some time. A surfeit of new issues in the first half of this year tested the market’s appetite to the limit. Mutual funds, which are big holders of the bonds, have suffered redemptions from their investors, forcing them to cash out of their holdings, often at any cost.
Short sellers have taken advantage of the segment’s woes and pushed bond prices lower. As of last week the value of shorts on foreign bonds was 516 million shekels, versus 400 million a month earlier and 300 million in August.
Yishay Sasson, senior analyst for real estate at Discount Brokerage, said investors’ chief concern is that the companies, many of which are registered in the British Virgin Islands, won’t be able to roll over their debt in the new era of rising interest rates.
“The business model of real estate companies – not just Americans – is based on rolling over debt by redeeming older bonds and issuing new ones,” he said. “The fear that has surfaced in recent weeks is that with the prevailing high bond yields, BVI companies won’t be able to raise new capital.”
Sasson said that at the same time, high borrowing costs in the United States would reduce companies’ cash flow and make it harder for them to meet repayments.
Brookland Upreal announced two weeks ago that it wouldn’t be able to make repayment on 150 million shekels in bond debt and asked bondholders to negotiate a new payment schedule. The company blamed cash-flow problems arising from slower-than-expected sales in its Brooklyn real estate market.
Another company, Extell, announced that it was redeeming half its Series Aleph bonds, paying back 525 million shekels in principal and another 25.7 million this week rather than rolling over the debt. It moved up repayment to December 3 from the end of the year.
It was the first time an American property company opted for repayment.
Extell bonds trade at junk levels and its credit rating was lowered to A-3 from A-2 by the Midroog rating agency, though it was removed from the Credit Watch list in September. Extell, which has another 585 million shekels in bonds due next year, has been contending with a slowdown in the New York luxury real estate market.
Not everyone is bearish on the Americans. One market source, who asked not to be named, said he wasn’t expecting any new bond issues during the bad atmosphere, but said many of the companies were performing well enough.
An analyst speaking on condition of anonymity agreed. But he warned: “Not all of the companies have lost investors’ confidence, but if the companies don’t manage to calm investors, the repricing we’ve seen in recent days will hold and will make it hard to roll over the debt these companies need.”