Confident Tshuva Will Weather the Crisis? Buy Delek Bonds Now

Why are the little people, the financially weak and pathetic, afforded better terms than the big strong companies?

What interest rate will banks be charging on new mortgages? About 5% (linked to the cost-of-living index). And what rate will Nochi Dankner be asked to pay on a loan to IDB Development and Property? About twice that figure, and people like Eliezer Fishman, Lev Leviev and Yitzhak Tshuva will have to pay three or four times as much.

Why then, are we, the little people, the financially weak and pathetic, afforded better terms than the big strong companies? One reason is that a mortgage for buying an apartment is a relatively secure loan - as long as it is not an American-style sub-prime mortgage, of course - so the bank is willing to grant it at low interest.

The main reason, however, is that Israel's business tycoons are not so big and strong anymore, but are rather overinflated. Their companies owe huge sums to banks and investors. Each of the five big names owes tens of billions of shekels, and smaller ones owe a few billion.

In today's reality, when debts are huge, securities are plummeting and business activity is slowing, the stability of all borrowers comes into question. We are currently in better shape than the tycoons. Can this help us turn a little profit at their expense? Of course. This is precisely the reason the stock market was founded, and, indulging in a little analysis, we can draw conclusions about our money.

The intriguing story of the past few days is the one unfolding in the corporate bond market. Anyone perusing bond-yield tables will be surprised to discover that the biggest businessmen, the ones in the headlines every day, want to pay us high interest on our money.

How high? That depends on each mogul's current business situation, but the numbers have never been higher. Corporate bonds issued by Leviev's Africa Israel Investments are offering annual interest of 18% (linked to the cost-of-living index); Fishman's Jerusalem Economic Corporation is promising 19% and Tshuva's Delek Real Estate bonds are trading at a yield of 25%. Hundreds of other bonds are trading at a wide range of yields and redemption dates, all in keeping with the perceived risk that the debt will not be repaid. The higher the risk, the higher the yield.

Investors buying Delek Real Estate series E bonds, which have a maturity of five years, will receive 25% annual interest, which means their money will more than double in five years. The risk involved, however, is that the company will go belly up and will not repay its debt. Such a possibility seems far-fetched at present, but it does exist, so every investor must keep two possibilities in mind - either that the borrowers will go bankrupt and our money will disappear, or that we really have a big chance to turn a handsome profit. The only question prudent investors must ask themselves is who is most likely to pay his debts, and who will renege.

Bonds are essentially a loan granted by the investor to whomever is selling the bonds, in exchange for a promise of annual returns. In addition to repaying the loan in full after two, three or even six years, a company promises to pay annual interest, and most bonds are index-linked.

The yield on a bond is derived from the combination of the principal and interest. A five-year bond, for example, with a face value of NIS 1 and which commits to paying 6% annual interest, has a yield of 6% when the bond is redeemed at the end of the loan period. If a person buys 1,000 such bonds, he would receive 6 agorot per bond per year, or NIS 60. After five years his NIS 1,000 would be returned.

Since bonds are traded on the stock exchange, their price changes every day. The higher the price of a bond, the lower its yield, and the lower the price, the higher the yield. When there is a severe crisis in the capital markets, bond prices plummet and their yields soar - and this is where opportunities pop up. If, for example, the price of that NIS 1, five-year bond with 6% interest sinks to 50 agorot, 1,000 bonds will cost NIS 500, and the NIS 60 annual interest becomes 12%.

In addition, after five years, instead of NIS 500, the investor would receive NIS 1,000 - the face value of the bonds. Such an investment therefore has a much higher return than offered on the day the bond is issued.

Does this mean we should make a beeline to the bourse and buy bonds right now? If you think the end of the crisis is at hand - yes. Investors can, of course, diversify their risk by buying an exchange-traded certificate on several bonds, or participation units in a mutual fund that invests in bonds, or in exchange-traded funds on the Tel-Bond indexes, which track the corporate bonds on the Tel Aviv Stock Exchange.