Debt Deals Decimated Investments

Not a few Israeli companies listed on the Tel Aviv Stock Exchange have issued corporate bonds in the last few years. Following the tech crash of 2002, the capital market suddenly became an alternative to banks as a source for financing, and corporate bonds became all the rage. But not all the companies that issued debt, selling their bonds to investors, were strong enough to stand firm when the times turned bad. The result has been a slew of defaults and delays in repayments, leading to debt arrangements. Now a study by the Israel Securities Authority indicates that investors are losing their pants from these arrangements.

Specifically, says the watchdog, the debt arrangements taking shape between corporate Israel and the bondholders will cause the latter to lose about 66% of their investment.

When a company issues bonds, it does so based on a prospectus. The terms of the bond are specific, and include repayment milestones and details on interest payments.

The securities watchdog found that 36 companies that issued bonds are in the process of reaching new arrangements with bondholders, or have defaulted. Altogether these companies owe investors NIS 5.4 billion. But the value of their bonds have fallen on the marketplace. If the bonds were sold, they'd bring in no more than NIS 1.7 billion now.

The price on the market indicates that players think investors will only get back a third of their money.

Of the 36 companies, 14 already have reached new deals with their bondholders, 13 are in the process, six are in liquidation and three are in the earliest stage of a debt arrangement - the bondholders have yet to appoint a representative to negotiate on their behalf.

The 14 companies that have reached arrangements owe their bondholders a combined NIS 1.5 billion. Yet their bonds are trading at a combined value of just NIS 500 million. Ergo, even here, judging by the bond prices, market players feel the investors will get only a third of their money back. In most cases, the debt arrangement involves spreading repayment over more years, which means extending the risk of default over more time. In some cases, bondholders forgive part of the debt. The reward is usually higher interest payments and/or an equity position.