All That Glitters / The Control Freaks and Their Minions Who Ravage Our Savings

If institutionals sold tycoons' bonds at a loss in the last few months because they didn't want to see themselves mentioned in the press, it proves once again how rotten our capital market is.

In 2010 the debt settlements and "haircuts" of Lev Leviev's Africa-Israel Investments and the Ofer family's Zim Integrated Shipping Services seemed to be isolated remnants of a crisis fading into history. But now everything has become crystal clear: such maneuvers are a plague of national proportions.

In 2011, Lev Leviev and the Ofer family were joined by Ilan Ben Dov with Tao Tsuot, Yitzhak Tshuva with Delek Real Estate, Avi Wertheim with Inspire Investments, and now Yossi Maiman with his Ampal-American Israel Corp. gas dealings.

Nochi Dankner could face a derivative lawsuit by shareholders.
Olivier Fitoussi

Rest assured that despite attempts to obscure what's going on, Maiman's proposal to Ampal bondholders means a haircut. Otherwise Maiman would simply stick to his original agreement and pay off the debt on time. The appeal to bondholders proves by its mere existence that he's asking them to give something up.

Any delay in paying the debt, regardless of whether any goodies are given in exchange, like higher interest or guarantees, is nothing more than a futures option. Ampal's cash flow, which should service the debt to the public, is based on income from the precarious Egyptian gas pipeline.

Maiman hopes Egypt's future rulers will uphold previous arrangements signed with Hosni Mubarak's people and protect the pipeline to Israel, which is being attacked every few weeks by terrorists. But Maiman has lost the influence he once enjoyed in Egypt, and nobody knows what arrangements can be sustained with a government controlled by the Muslim Brotherhood.

So this is just another case of the "matzliach" method - getting away with what you can - that tycoons playing with the Israeli public's retirement funds enjoy so much. This time it goes like this: If all turns out fine the public will get its money, Maiman will keep control of the company (while drawing a colossal salary ) and everyone will be happy.

And if all doesn't go well? Then it's clear: The public won't get all its money back, regardless of what the interest rate had been or the kinds of goodies that were offered.

Does anyone among the institutionals or their client investors actually think that an optimistic scenario for Egypt is a good bet right now? If so, by the way, there are other alternatives that may be better and more diversified: for example, building a portfolio of shares traded on Cairo's stock exchange, which has fallen 47% this year and will certainly recover nicely if Egypt stabilizes.

After Maiman announced he'll have difficulty paying the debt on time, three alternatives remained. The first was that Maiman would bring in some of his own money and give the company an owner's loan to pay off the public in full and on time.

When negotiating with Leviev over Africa-Israel's debt settlement, Roy Vermus, then-CEO of Psagot Investment House, made his famous demand: "Let them bring the airplanes." In the same vein Maiman could be advised to "sell the yacht" - on display for all to see in Herzliya's marina - on which he hosts VIPs from Israel and abroad. But Maiman apparently lacks the necessary funds to make an owner's loan, an assessment reinforced by the fact that he stopped pouring money into Channel 10, which he also owns.

The second alternative is reaching an agreement for Maiman to personally continue running the company. But this alternative is only relevant if Maiman is believed to be more capable than anyone else in the world of generating extraordinary value for Ampal - through contacts in the Egyptian regime, for instance.

But these contacts went up in smoke during the Arab Spring: Former President Mubarak, along with his sons and businessman Hussein Salem, are now on trial in Egypt for charges of accepting bribes when striking the gas deal with Israel. From a bird's eye view it's hard to see what added value Maiman, a former crony of Mubarak's entourage, could offer in maintaining contacts with Egypt.

So we're left with the third option: Maiman could transfer his shares and control in the company to its creditors. Under direction by the court and the management it appoints, creditors would decide what to do with the company. The could continue to run it, sell it piecemeal, or sell it in its entirety.

According to its latest financial reports, Maimon's company has cash resources, ownership of Gadot Chemical Tankers and Terminals that can be realized, and, of course, its holdings in Eastern Mediterranean Gas - the Egyptian natural gas company. At least one good thing would come out of Maimon transferring his shares: the company would no longer need to pay him a NIS 12 million annual salary, as it did in 2010, or an annual salary of NIS 6.7 million to CFO Irit Eluz. A court could, beyond doubt, find managers at a lower cost.

But who would buy Ampal's assets from the court? The sale by banks of their non-financial holdings in the wake of the Brodet Committee recommendations, and their sale of provident and mutual funds following the implementation of the Bachar Committee recommendations, proved there are buyers for anything - even at high prices. Threats of finding no buyers are baseless.

Transferring control of the company to its creditors would have an important effect on Israel's capital market beyond the move's direct ramifications for Ampal and Maiman. First, it would put an end to the epidemic of debt arrangements and haircuts for the Israeli public. Second, the measure would send the magnates a message: Either reach into your pockets and pay up, or control will be handed to the creditors and you'll be out of the picture. Thirdly, it could end another reprehensible practice by the institutionals: selling their problematic securities in the market, while locking in losses, to create the illusion of not being involved during debt settlement talks and to avoid finding themselves in a public battle with the tycoon (for who knows what job he could offer down the line ).

Why are the institutionals selling bonds at a loss?

When we called several trading rooms in Tel Aviv on Tuesday and asked, "Who's selling IDB bonds, like series B4, the past few days?" we got mumbled responses. "There is selling by institutionals, selling by mutual funds hit with redemptions, and there is probably selling done by one insurance company," we were told.

The basic facts are well known: Since the end of September, over the past two and a half months, IDB series B4 bonds tumbled by about 39% and finished the day trading at 59.8 agorot, reflecting a 19.1% yield. A yield this high could only indicate that the market doubts the ability of the country's largest business conglomerate to meet its obligations.

We didn't choose the end of September by accident: We know something about who held these bonds at that time. According to data from Praedicta, mutual funds held about NIS 75 million of IDB series B4 bonds at the end of September, in terms of their prices at that time; provident funds held about NIS 334 million; insurance companies: about NIS 110 million; and pension funds: NIS 130 million.

In total, the institutionals held about NIS 650 million at the time in the series, which had an original value of about NIS 1 billion. Now, by the way, the total market value is only approximately NIS 400 million.

We've gathered from the trading rooms that several of the institutionals sold part of their holdings in series B4 since the end of September, locking in losses for their clients - meaning they took a haircut from the market. But why did the institutionals do that?

This is odd: Provident funds, insurance companies, and pension funds are very long-term investors that should know enough to ignore short-term movements arising from panic or isolated redemptions in investment portfolios and mutual funds. If they believe IDB will meet its obligations, then continuing to hold onto these bonds - or even acquiring more - would mean a bonanza. This is a security that will provide a double-digit index-linked yield annually to the end of 2020. So then why are some selling the IDB bonds at a burning loss?

Two possibilities come to mind. One is that some of the institutionals don't really believe IDB can meet its commitments, or even repay most of its debts in the case of receivership and liquidation involving the sale of the group's assets with the proceeds going to creditors, including bondholders.

But another reason can be inferred, one more complex and political. According to the opinions we gathered, there seem to be institutional investors that don't want to find themselves in the position of being forced to negotiate with the controlling owner - namely Nochi Dankner in the case of IDB - over any possible debt settlement. This would be an uncomfortable position for them if they have business contact or ownership ties, for instance, with the controlling owner.

Clal Finance is a case in point: The mutual funds it manages held a total of NIS 4.6 million in IDB series B4 bonds at the end of September. This isn't a huge amount, and Clal Insurance Enterprises Holdings stands out by its lack of investment in these IDB bonds. But would the manager at Clal Finance really want to take part in debt settlement negotiations opposite Dankner, the man he has to thank for his job?

It is almost possible to understand the motives of the institutionals' managers, but they mainly expose, once again, the complications and conflicts of interest created when a businessman controls both real assets and financial firms that manage the public's money. This isn't a story about Dankner or IDB, but about controlling owners and the warped relationships they have with the institutional investors that manage the public's funds.

If there are institutionals that sold bonds of tycoons at a loss in the last few months because they didn't want to see themselves mentioned in the press ("We aren't part of this; we have no part in the story" ), or were wary of getting involved in debt settlement negotiations with a tycoon, then it proves once again how rotten our capital market is. In acting this way, they protected their own asses, reputations, and personal interests at the expense of the shrunken pensions of millions of Israelis.