Dodgy Firms Alert

Public must be picky, warns ISA chief Moshe Tery

The public doesn't always know what it's doing and can come a cropper in the primary market, warns Israel Securities Authority chairman Moshe Tery.

He warns of over-enthusiasm for the wave of offerings hitting the primary market, even going so far as to say there is danger to the public in investing in new offerings.

The public must exercise caution when buying into offerings, said Tery, explicitly warning that there are currently quite a few offerings by "poor quality companies."

A warning from a senior regulator against danger to the public in its investments is extremely rare: it indicates just how worried the ISA is about the boom market in stock and corporate debt offerings.

"I call on the public to examine each offering very closely. Look at the company, its managers and its history," Tery told TheMarker. "We are very worried by the fact that these things are no longer done today, and any offering gets bought.

"We are starting to see offerings by poor quality companies, including companies we ordered to emphasize certain very worrisome figures in their prospectus. Still, these offerings are grabbed up in their entirety. This is very risky."

According to Tery, most of the companies going public are excellent ones, but he is worried by the loss of choosiness which is allowing even lower quality companies to easily raise money from the public.

"We have 200 issues in the pipeline waiting for permission," Tery reveals. "This reminds me of not-so-good times," he adds, hinting at the TASE's 1994 bubble.

Aside from warning the public against buying into issues directly without being choosy, the ISA is also working on reviewing the investment considerations of the public's messengers to the capital market, portfolio managers and mutual fund managers.

The watchdog plans to demand that portfolio managers and maybe also mutual fund managers publish their considerations in various offerings. In addition, portfolio managers will be required to get client permission in buying into offerings and will have to reveal to the client any connections they have to the company offering the security. ISA has other planned restrictions in the pipeline, too.

The year 2006 was a record year for financing on the Israeli capital market. Companies raised NIS 90 billion, about half in shares and half in corporate bonds.

This outpaced any previous year, including the boom years of 1993 and 2000 (in real terms). Fundraising in 2006 was essentially twice the previous record set in 2005. The pace this year, by the way, is only increasing. In January 2007 alone, publicly traded companies raised NIS 10 billion, NIS 7 billion of which was in corporate bonds.

Capital market sources believe the primary problem in the IPO is actually in corporate bonds, not shares. The issue process is motivated by the public's ever-increasing appetite for corporate bonds, which the public believes is a solid investment carrying little risk.

For this reason, the public is injecting huge demand into mutual funds that specialize in corporate bonds, and these funds are the prominent buyers as companies issue paper. In November-January, corporate bond-oriented mutual funds raised NIS 6 billion, although the sum was heavily weighted toward January.

But perhaps the public doesn't fully realize that a corporate bond offering is just not as safe as an offering of government bonds, practically by definition. There is always the risk that the company can't repay the debt.