Analysis / Pickings in the Junk Yard

Many contractors are trading at sky high yields.

These are unnerving days in the global marketplace and Tel Aviv is no exception. Yesterday the indexes regained some ground after falling hard - around 4 percent - on Sunday, brought low by the subprime rumbles in the United States, and fears of a subsequent credit squeeze.

Analysts reassured frightened investors that Israel's economic fundamentals stayed strong, but then a large housing development company, Heftsiba, imploded.

Corporate bonds are an Israeli market niche that tends not to make headlines. Yet mutual funds targeting corporate bonds were all the rage this year. The public placed billions of shekels into these funds, hoping to take advantage of the bonds' handsome returns relative to government paper. They invested mainly through funds that specialize in corporate bonds.

Corporate bonds return more than government paper precisely because they're riskier. To attract investors despite that risk, the companies provide higher returns.

There is another problem: liquidity. Trading volumes in corporate bonds are much lower than those in government bonds. So when the tables turn and you want to dump the dogs, you may not be able to.

Some investment managers even touted corporate bonds on the following grounds. During the last rout on the marketplace, investors who wanted to dump government bonds could and did, hence corporate bonds generally suffered less.

Yet that very illiquidity has been horrible for holders of corporate bonds this time around. Some are dying to divest and they're stuck with the stuff, which is shrinking like ice in a firestorm. This time around, government bonds have lost ground, but nothing compared with corporate paper. Their retreats would not have shamed a small-cap that had admitted that the tea-lady had absconded with the piggy bank.

Take bonds in Mydas Investment Fund, which on Sunday shrank 11.7 percent, then rebounded 3 percent yesterday. Sybil Europe bonds lost 11.6 percent and didn't rebound. Bonds of Shikun Dayarim sank 10.2 percent and, yes, they didn't recover either yesterday.

Then there's Arko Holdings, whose bonds dived 9.1 percent. They hovered below the flatline today too. Bonds of Isralom, which is controlled by the Bronfman-Fischer group, sank 4.6 percent; Hanan Mor retreated 4.6 percent; and bonds of Boymelgreen Capital, a vehicle of American developer Shaya Boymelgreen, dropped 7.2 percent last week.

You may be reading this and becoming inured to the figures. But remember: These are bonds, not small-cap stocks.

Yet even this is nothing. The bonds of Gmul Real Estate, controlled by Eyal Yona, brother of Boaz Yona and son of Mordechai Yona (yes, of Heftsiba fame), lost 12.5 percent, though Eyal said he had no affiliation with his the business of his father, who has reportedly fled to Russia.

And just look at their returns. From one perspective, they're exciting, and from another, they're frighteningly high. These are the bonds known as "junk", and the really scary thing is that these are series whose volumes can be in the billions. Some were just issued a few months ago.

Not sweating yet? Consider this. You're involved.

These junk-level returns reflect acute risk, and many an institutional investor chose to undertake that risk - on your behalf. Provident funds, mutual funds and pension funds bought into these series of high-return, high-risk bonds. You almost certainly have money in one of these vehicles.

Lito Group tops the list of the high yielders. Its series A and B bonds trade at a yield of 32 percent. Both have fallen 35 percent in price from the start of 2007. Bonds of Lito Real Estate trade at a yield of 20.7 percent. They have dropped 23 percent this year.

Second only to Lito is the Contractors & Builders Development Company, with a yield of 19.8 percent. Then there's Sybil Europe, with a yield of 15.6 percent.

Duisberg Holding trades at a yield of 17 percent, and a long list of companies trade at junk-status yields of 15 percent, including Exom, Ofek Real Estate, Landmark, Shikun Dayarim and Dadeland Towers.