Israeli regulators proposed on Monday that companies that fail to make bond repayments on time should go into insolvency proceedings after just a month and a half, in order to improve transparency and discourage firms from overextending themselves financially.
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A panel led by Finance Ministry director general Yael Andorn made the recommendations to encourage the growth of Israel’s debt market after a number of high-profile debt settlements angered the public and harmed investor confidence.
Owners and managers of companies that have overextended have in many cases demanded that retail bondholders and pension funds make haircuts to bail them out and allow them to continue operating.
With the risk of prompt insolvency proceedings, however, owners would be more at risk of losing control of their firms, while bondholders would gain clarity and more control in the process.
“This will change the rules in the credit market and form a better framework for the different players,” Andorn told reporters on Monday as her committee presented its final recommendations.
“This will take away most of the uncertainty in what happens when a company does not pay its debts,” she said, adding that the new rules “would bring a better pricing of risks ... and create a better balance among controlling shareholders”.
Since 2008, 148 Israeli companies have entered into settlement arrangements on debt amounting to 40 billion shekels ($10.5 billion), 18 of them since the start of 2013.
“We are not against debt arrangements when they are made to prevent a company’s collapse or liquidation,” said Finance Minister Yair Lapid. “But they must be made under unified rules that are clear and transparent, and which don’t make the public’s finances worthless.”
Andorn’s panel, which included securities, banking and capital markets regulators, recommended a two-stage approach to debt restructuring.
In the first phase, companies that can still pay their debts but are in financial difficulty will have an observer appointed to their boards who will help with financial decision-making such as how to limit expenses.
The second stage kicks in when a company has failed to pay bondholders for 45 days. Bondholders would then initiate insolvency proceedings, and the company would be turned over to a court-appointed receiver.
Andorn said the new rules should be written in the next 60 days.