Israeli Firms Have Fared the Global Crisis Well? Don't Believe the Hype

The default rate of the country's companies is several times the average worldwide.

Several years ago Israeli credit rating agency Maalot became part of Standard & Poor's and adopted the name S&P Maalot. It has since provided us with a glimpse of how we stack up against the world, or to put it bluntly, our poor performance against the rest of the world.

Rating agencies rank bonds to determine how safe or risky they are. S&P is one of the three top international rating agencies, which drew heavy criticism for not anticipating the 2008 global economic crisis. Their ratings weren't worth the paper they were printed on. Their reputations remain sullied to this day, but the information they provide is still valuable.

Maalot compared the number of Israeli companies it rates that ended up in debt settlements and the number of companies S&P rates worldwide that met the same fate. The Israeli cases amounted to 2% of the global tally, whereas Israel makes up only around 0.3% of the global capital market.

This shows that the Israeli default rate is six times the rate in global markets. Let's not forget that Israel is considered a country that survived the global crisis rather well. Just imagine what would have happened to the percentage had the economy gone into deep recession.

Our share of debt settlements is actually much greater. Maalot's comparison only includes companies rated by it or global S&P. According to Maalot's study, the number of debt settlements since 2008 totals 93 - not including several with bonds not publicly traded like Zim Integrated Shipping Services. Only 16 of the 93 involved rated companies, either by Maalot or Midroog, Israel's other rating agency.

So the actual number of Israeli debt settlements is actually six times the number included in Midroog's global comparison. But since we don't know how many unrated companies default around the world, Israel's overall standing can't be determined. But we should note that investing in unrated bonds isn't common in most major capital markets, so even in this regard Israel's capital market probably does poorly.

According to Maalot, the 93 companies slipping into debt settlements since 2008 are among the 322 companies with bonds trading in the market: A whopping 29% of all bond-issuing companies. Here too, the comparison with rated companies around the world is interesting.

The percentage of rated companies in Israel forced into debt settlements since 2008 is a cumulative 5%: between 0.6% and 2.9% in each of the last four years. Meanwhile, the default rate for investment-grade companies around the world has been no higher than 0.4% a year, and the rate for speculative-grade companies with bonds in junk territory has varied between 1.4% and 9.5% per year.

So the question is: Which group should Israel compare itself with? When Israel is measured against the investment-grade global companies, it finds itself with almost 10 times the number of insolvencies. But compared to the world's speculative-grade companies, the percentage of Israeli defaults is just one-third.

Which league do Israeli companies belong to: the premier league or inferior league? S&P Maalot has a clear answer: Israel belongs to the inferior league. Almost no Israeli companies except for Teva Pharmaceutical Industries, the banks and the insurance companies are ranked investment-grade at the global level. Even those with high local ratings are actually considered speculative when ranked on a global scale.

So Israel isn't the debt settlement champion in the league of second-rate companies around the world. But the figures are far from flattering for anyone hoping to see Israel's capital market included in the world elite.

S&P also examined the debt levels of rated Israeli companies compared with rated companies worldwide. The Israeli companies were found to have very high debt-to-equity ratios - another black mark against the Israeli capital market and another reason for the many debt settlements here.

The country's real estate companies hold debt levels 50% higher than their European counterparts, while for Israel's holding companies - the so-called pyramids - the debt levels are three times as high compared to Europe. This is further proof that the main problem plaguing our capital market is the proliferation of pyramid business groups.