Institutional Investors Finally Close Barn Door, After Bonds Horse Bolts the Stable

The institutional investors are gearing up for battle. On Tuesday, Amitim pension fund CEO Yael Andoran threatened Alony Hetz Properties & Investments, saying it would lose a financing source if Amot Investments, controlled by Alony Hetz, did not reverse its decision to disburse a disproportionately large dividend. Roi Vermos, CEO at Psagot, Israel's largest Investment House, has voiced similar sentiments.

"No one is going to get any more money from me if he allows companies with which he is associated to shirk their debts," says Vermos, "and that includes [Yitzhak] Tshuva, [Nochi] Dankner and [Eliezer] Fishman."

Forceful words indeed, except that they are a bit late in coming. In the past few years, both Psagot and Amitim have bought corporate bonds with great gusto. In their excitement, most of the institutional investors did not waste time on petty technical demands. They did not, for example, require the bonds to be backed by any securities - the overwhelming majority of bonds in the capital market were issued without any securities. Nor was there any demand that the bonds meet financial standards. No conditions were ever set, for example, forbidding a company from disbursing huge dividends before meeting its obligations to bondholders, or that the downgrading of a company's securities rating would result in the immediate partial repayment of the company's bond debt.

The institutional investors simply bought the bonds without troubling themselves to ensure minimal guarantees in case something went wrong, such as debt remission becoming a reality. Now the institutional investors are trying to correct their error - with empty threats that anyone who does not give in to their demands will get no more financing from the capital market. At present, however, the capital market is not offering any company financing, no matter how strong their securities.

The moral claim against the corporate executives who are emptying company coffers via high wages or dividends, without a care for the bondholders still holds, as does the beef against tycoons who allow their associated companies to collapse, while they continue to fly around in private jets. As strong and justified as these claims may be, the capital market is not controlled by morality, but rather by the law, which is pretty shaky concerning the rights of the institutional investors in the bonds they purchased.

So what can we do? We can bolster the law so that bonds cannot be issued without guarantees of the financial strength of a company and its bonds. As for the existing inventory of bonds, we can only insist that the company owners not evade their obligations. Institutional investors that threaten to send companies into receivership, and make good on their threats, will likely see a larger chunk of their debt repaid.

The Israel Securities Authority can also help: If the authority orders boards to consider how dividends, executive wages or deals with substantial shareholders affect the company's bond repayment ability, board members will presumably think twice before approving such expenses. If a company is unable to meet its bond payments after the board declares that a deal it approved does not endanger bondholders, the board members should be held personally accountable.