Analysis / Is It a Bubble?

Israel's capital market has been put to the test in the last couple of weeks. It's the test of the 100 Prospectuses - a hundred sundry companies are looking to raise capital from investors.

If the market passes the test and actually gives at least most of the companies the money they want, two things will happen. One: The capital market will have proved it's a boom. Two: The number of prospectuses published in the second quarter will grow fourfold.

So the question arises. Is this a bubble?

Dorit Salingar, chief executive of Maalot - The Israel Securities Rating Company, got balled up in that question this week in an interview with Globes. She said that the developments in the market remind her of the 1993 bubble.

But Salingar had been misunderstood - all she meant to say, it transpires, was that the offerings of convertible bonds, which are instruments somewhere between a bond and a stock, are causing irresponsible behavior. Most of the offerings are for unrated securities, is what she wanted to convey.

Since Salingar heads a rating agency, one can understand her view, but the interview sent the capital market into an uproar anyway. The market thought she meant bonds - rated and unrated alike - were being sold at inflated prices, and that the prices were what reminded her of the 1993 bubble.

But if anything, the pandemonium she sparked shows that Salingar had touched precisely on the market's Achilles heel.

The capital market is evidently deeply worried about prices, specifically whether they have reached unrealistic heights. Unusually, that question is focusing mainly on the bond market, which is where almost all new offerings are taking place. Cheap interest rates are inducing more and more companies to issue debt at convenient terms.

Owner's in jail, so?

The question is whether interest on the market has fallen beyond that dictated by prevailing interest rates; the question is whether investors agreed to forgo risk premium just in order to lend money to a company; the question is whether the market's zeal to lend to anybody holding their hand out is leading it to make bad loans.

Take a company like Isras, whose controlling shareholder, Shlomo Eisenberg, is doing time for trying to defraud public shareholders. Until a few months ago, Isras was anathema. Nobody would touch it with a barge pole. Yet suddenly a distinguished underwriter, Clal Underwriting, is shepherding Isras to the marketplace for money.

That doesn't mean Isras will actually get what it wants. But the fact that an underwriter is willing to risk its good name by taking Isras in hand means it thinks the company can pull it off.

Institutional investors, mainly mutual funds but provident funds as well, and insurance companies and pension funds, are bustling to take part in almost any offering at hand, at almost any price. Little bitty companies that could barely turn over profit or treat investors with any respect are raising money. Companies are raising capital despite a complete lack of collateral or backing. Each and every lesson from the painful years of 2001-2003 regarding the importance of actual assets behind debt, is being ignored. Perfectly distinguished companies are raising money - but at interest rates so low that Israeli treasuries are blushing in embarrassment.

As might be expected, the real passion is reserved for convertible bonds, a clear sign that the boom on the bond market will pass over to stocks soon enough. And stocks are hovering at record heights, with the TA-25 index at 700 points.

So, is it a bubble? The good news is there's no consensus. Sure, prices have risen high but they're far from Alan Greenspan's famous "irrational exuberance", say some.

The bad news is that the disagreement is bordering on the vicious: Feelings are running very high, attesting to intense jitters. Even if it is not a bubble, what's clear is that the market is expensive, and dangerous.