Investor Nails Bond Offering With Decillion-shekel Order

Don't know what that means? Neither did the underwriters

Lawyers and underwriters for insurance company Menorah, which held a NIS 200 million bond issue on Sunday, were taken aback by one of the bids they received. The bidder, a member of the Tel Aviv Stock Exchange, bid a decillion shekels for Menorah bonds, for itself and its clients.

Underwriter Clal Finance Batucha googled the word 'decillion' and learned that it means 10 to the power of 33.

In other words, the bidder sought to acquire bonds equal to 10 to the power of 21 times the value of all the assets in Israel, which equal NIS 1.9 trillion.

The bidder was aware, of course, that only NIS 200 million worth of bonds were for sale. It just wanted to make sure it would win all that it could.

Because half the issue was limited to institutional investors, the bidder successfully ensured that it would acquire the balance.

The bidder took advantage of two flaws in the system of public offerings.

One is that there is no pricing: bidding is based on quantity. Therefore, at the maximum price offered, investors can enter huge bids to try to obtain a large portion of an issue. It's been done for years - remember the Solbar Industries orders that mounted beyond a trillion shekels? But an order of a decillion is a new record.

The second problem is that bids are only on paper. A bidder is not required to secure a loan of a decillion shekels to make such a bid, only submit a piece of paper with a number.

The prospectus' publishers also contributed to the fiasco, forgetting to limit the size of allowable orders. One investor noticed the oversight and seized the opportunity to make the huge order.

Aside from the other investors, a big loser is the Israeli capital market, seen by some observers as a market where absurd things can happen. The Israel Securities Authority is aware of this, and a new underwriting law that comes into effect in July is expected to prevent bidders from submitting inflated orders in auctions where prices are not limited.

The Israel Securities Authority also said that if necessary, to prevent inflated bids, it will consider limiting the maximum order to twice the size of the issue.