It’s Time for Bondholders to Learn How to Fight

Institutions need to routinely refuse debt-settlement offers and simply take companies to court, expose them and have them liquidated or auctioned off as going concerns.

Imagine the following: You’ve just returned from vacationing abroad and find a vicious-looking squatter in your bedroom who shows no intention of leaving. Obviously you ask him to leave your house immediately, but he counters: “This room’s mine now, so fugetaboutit. If you want the rest of the house, let’s talk. I’m willing to consider your needs, but I also have my own conditions. Anyhow, if you refuse and go to the police, the whole house will probably go up in flames.”

That’s more or less what happens in most instances when companies in Israel get themselves in trouble, with the haircuts and debt settlements that follow. The tycoon, or rather the one-time tycoon, is the squatter and you’re the homeowner. The person you loaned money to tells you his business went sour and he can’t meet his obligations and payments. Then he makes you an offer: “Part of the money is gone and nothing can be done about it. But if you want to see the rest of it, accept a debt settlement and maybe I’ll throw something in. But listen up: If you refuse to settle and go to court, you probably won’t see a dime.”
The first cut ain’t the deepest
In some cases the first haircut, the one that nobody disputes, is relatively modest, like the debt settlement by Africa-Israel and Lev Leviev. In other cases the settlement involves a haircut of 60% or more, like with Yitzhak Tshuva’s Delek Real Estate. And there are times, as with Yossi Maiman’s Ampal-American, when the owner brings nothing except promises dependent on future developments − and still insists on maintaining control and receiving steady management payments ‏(according to Entropy Consultants who advised its clients to reject the debt settlement he offered them‏).
Now for the big question: What should be done?
On the one hand you’re angry and frustrated, and determined to get even. You think the owner should hand the company over to the court, which will peek inside and determine whether it was properly managed and whether the owners milked it unlawfully, and its assets will be distributed to the creditors. On the other hand the owner is trying to fleece you: “If you don’t go to court I’ll give you something, you’ll leave me with control of the company, and in the final tally you’ll get a bit more money.”
So, again, what should you do?
For most institutionals there is only one answer: Always shoot for the most money, even if it’s only one cent more. That’s life, that’s business, according to their approach: “Our fiduciary duty is strictly to the individual who holds his account with us.” They don’t mention that if they take any other consideration into account the individual could sue them. But this approach, however logical, hurts the institutionals themselves in the end and the public entrusting them with its money.
The logic of the situation is actually similar to what happens when terrorists take hostages and demand something in return. The U.S. policy of refusing to negotiate with terrorists contrasts the approach taken in Israel and most other countries of negotiating in an effort to achieve the least devastating consequences. The results are that, whereas terrorist organizations try over and over again to kidnap Israel’s soldiers, American soldiers are never targeted. It simply doesn’t pay.
This applies too in the debt-settlement bazaar of the Tel Aviv Stock Exchange. The decision to take control of a company away from its owners and place it in the hands of the court for sale or liquidation, in any given situation, will end up with bondholders losing money. But in the bigger picture, if owners and business barons knew they were unable to give a haircut or arrange a settlement without losing control and seeing their business dealings exposed, it’s highly likely they would manage their companies completely differently − and much more responsibly.
The situation as it now stands among Israeli companies in financial difficulty is absurd. Making owners behave better
Public is denied the weapons
Lacking experience and clear rules for liquidating companies, and due to the institutionals’ unwavering preference for debt settlements, the public is being denied the main weapon it is supposed to wield in talks when facing owners who are shirking their obligations. Without this weapon, the public is weak. The owner, knowing this, doesn’t pony up all the money required, arranges haircuts for the public, and still manages to retain control of the company.
This is must be changed, and the institutionals are the ones that need to change it. They need to routinely refuse debt-settlement offers and simply take companies to court, expose them and have them liquidated or auctioned off as going concerns. That’s how to create the rules, the precedents and the knowledge of how to deal with failing companies − and that’s how to provide the public and its agents with a real weapon with which to successfully confront debtors.