Is the Israeli capital market indirectly providing finance for the gray market – the unregulated sector for loans, where often desperate borrowers can find themselves paying interest rates of 15% to 18% or more?
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A 220 million-shekel ($60.2 million) bond issue Wednesday by Peninsula, a publicly traded check-discounting company, suggests that the answer is yes. The bonds were sold to institutional investors, who were excited enough by the offer to place 740 million shekels in orders, leaving interest on the bonds at just 1.54%. The public tranche takes place Thursday.
The business of check-discounters like Peninsula – which is 48.9% owned by Meitav Dash, Israel’s second-biggest investment house – involves paying cash up-front to businesses holding postdated checks. Check-discounters, as their name implies, make their money by paying less than the value of the check, in effect loaning money to the businesses that sell them the checks.
At end of last year, about 39%, or 200 million shekels, of Peninsula’s credit portfolio, however, was not directly with business end users but with what the company calls in his latest financial report “loans to the financing sector.” Those are small check-clearing companies around the country that operate in what is popularly known as the gray market.
The gray market encompasses a wide range of informal lenders – most, but not all of them, operating legally, albeit without any government supervision. The biggest category is money changers, who charge borrowers that have no other place they can get loan rates of 15%-18% or more.
It’s a big business: Gray market loans outstanding are estimated to be between 20 billion and 30 billion shekels.
For Peninsula, subcontracting has become a growing part of its business: In 2014 it accounted for just 20% of its credit portfolio.
“Check clearers are the main growth engine for check-discounting companies,” said one industry source who asked not to be named. “For check-discounters it’s difficult to recruit end-user customers. So what do they do? The easiest thing is to take, say, a money changer in Eilat, who will do the discounting for you. When he doesn’t have the capital he needs or bank credit, the big companies help him because they have credit lines.”
The capital market – or more precisely the investing public – is financing the gray market indirectly.
It starts with the public putting its money with institutional investors, who in turn buy bonds issued by discounters like Peninsula carrying interest of 1%-2%. The discounters then engage in check-discounting – in effect loans – to their subcontractors at effective rates of 8%-10%. The subcontractors use the money to lend at rates that can be twice that.
Peninsula isn’t alone. Nawi Brothers, the biggest discounter in Israel, had 13% of its credit portfolios with check clearers, an amount equal to 200 million shekels at the end of 2016. Unlike Peninsula, Nawi Brothers has cut back on subcontractors in order to improve the quality of its portfolio. But the company has raised 450 million shekels in two bond issues from institutions.
SR Accord, on the other hand, has 37% of its credit portfolio with check clearers, or about 83 million shekels, as does Shoham Business. Only Opal Balance works exclusively with end-user clients.
In any case, gray market lending is gradually being subject to more scrutiny. The Knesset recently passed the Financial Services Law, which will subject non-banking lenders to regulatory supervision. A government panel seeking to reduce the use of cash throughout the economy, as a way of cracking down on the black market, has recommended limits on the number of times a check can be endorsed.