Hard Look / Eighty Companies, NIS 8 Billion Down the Drain

It's clear that a lot of the companies that borrowed money from investors during the corporate bond boom of 2006-2007 won't be able to repay.

By now it's clear that a lot of the companies that borrowed money from investors during the corporate bond boom of 2006-2007 won't be able to repay. This year and next, we will see which honor their debts and which fold up whimpering. But the truth is that in most cases, the writing on the wall is pretty clear. Market sources are whispering about 80 companies in trouble that raised some NIS 8 billion altogether. And some portion of our pension money is invested in these firms.

On the Tel Aviv Stock Exchange, each bond has a name and the figures are there for all to see. No less than 140 corporate bonds are trading at double-digit yields; 90 are trading at yields above 15% and 60%. Some are trading at yields above 20%. This is junk bond status - the capital market doesn't believe these companies are likely to repay investors in full.

"The financing that the capital market provided during the past two years was insane," said a banker recently. "There are going to be a lot of bankruptcies. We look at some of these publicly listed companies and can't understand how they could possibly repay their bondholders. There are real estate companies that raised money after telling investors they'd bought land on the moon," he exaggerated.

The banker went on to say that many of the companies raised money based on nothing: ephemeral dreams, money handed over with no guarantees or real collateral. "They can't repay the debt because their shareholders' equity has been eaten up and they won't be able to recycle it, either," he added.

And the pain will spread beyond the investment community, he predicted. "When it rains, everybody gets wet. When a bank works with a company that's suffering, it hurts too because a lot of the management attention gets diverted to financing the bonds and reaching debt arrangements. It causes damage all along the road. Reaching arrangements takes years."

Are the investment managers to blame for extending loans too easily, without thoroughly inspecting the borrower? In some cases, yes. But the problems are exacerbated by the unfortunate timing of economic and financial woes juxtaposing in time. The strong shekel weakened companies that do business in foreign currency. The high prices of oil and commodities aren't helping and inflation generates more financing costs. Above all is the shadow of the global economic slowdown and the implosion of property values.

All this has combined to make it harder to divest assets for liquidity, and more expensive to borrow.

In one sense, one may applaud the sad end of the excessive borrowing through the capital market. At least it's ending in one painful shot and the bad managers and companies won't have the opportunity to recycle their bad debt and continue to milk the system and us all for years on end.