Banks Told to Reappraise Collateral Backing Loans

Banks supervisor Roni Hizkiyahu has ordered the banks to reassess all collateral backing loans extended for the acquisition of company controlling interests.

When a loan is extended to acquire the controlling interest in a company, the money may be used to buy either shares, or bonds, in the target firm, which generally serve as collateral backing the loan. These days, as the global crisis bites deep, all too often the value of this collateral is collapsing together with equities and corporate bond prices.

At the end of January, Hizkiyahu, the supervisor of banks at the Bank of Israel, sent a draft directive to the banks, explaining that collateral must be revisited, by independent assessors.

If the resulting reappraisal finds the collateral is worth less than the value listed in the banks' books, the bank might be forced to reclassify the debt as dubious.

They could then require the borrower to add more collateral. In extreme cases, the banks might be required to recall their loans.

One fairly recent example of such a transaction is real estate magnate Lev Leviev's purchase of 80% of a 2008 Africa Israel share offering. He borrowed the money from three banks: UBS, Leumi Switzerland and Deutsche Bank.

Another example is Shaya Boymelgreen, whose company Boymelgreen Capital borrowed $165 million from Mizrahi-Tefahot to buy the controlling interest in real estate company Azorim.

Boymelgreen acquired Azorim at a company valuation of NIS 1 billion. The company's market capitalization melted down along with the global real estate sector and is now worth NIS 280 million, savaging the value of the equity backing the Mizrahi-Tefahot loan.

Yet another example is the credit Shlomo Eisenberg took from Mizrahi-Tefahot to buy Ocif Investments & Development from Arcadi Gaydamak - and the loan Gaydamak took from the very same bank to buy the controlling interest in Ocif in the first place.

Then there's the deal the private equity fund Markstone struck to buy Bank Hapoalim's mutual funds. Markstone borrowed NIS 400 million from Bank Leumi. That deal could also be considered a transaction conferring a controlling interest and therefore fall in the footprint of Hizkiyahu's directive.

Billionaire heiress Shari Arison also borrowed money to buy more shares in Bank Hapoalim, which she controls, as well as the controlling interests in Salt Industries and in Property & Building.

The Bank of Israel's concern is based on a study it conducted on loans taken to buy controlling interests. The data is from 2002 - not exactly contemporary - yet the conclusion was startling: Such loans were twice as likely to become "dubious" than other kinds of loans.

Previously, ahead of the banks' third-quarter 2008 financial statements, the supervisor of banks ordered them to report on their lending to "the tycoons" such as Lev Leviev, Nochi Dankner, Eliezer Fishman and Yitzhak Tshuva, and how much they were setting aside to cover problem debt in these cases.