Is the Writing on the Wall for Underwriting?

Recent optimism in the primary capital market has led to an impressive increase in conventions that include the participation of managers of underwriting companies. In recent months Ronen Zelnir, managing director of Poalim Capital Markets, appeared at more than a few such conventions, even going as far as Kibbutz Hagoshrim in the north, to attend a convention on the issuing of stock by Kibbutz Industries companies.

On Monday evening, at a management training conference organized by Prof. Joseph Gross of Tel Aviv University, Zelnir spoke about the problems facing the underwriting industry due to the restrictions of the old underwriting regulations and the fact that the new underwriting law has been bandied about for years by the authorities in Jerusalem.

Attorney Iris Cibulski-Havilio of the Israel Securities Authority explained the many advantages of the new underwriting law that the ISA is working hard to finalize and the conclusions of the committees that examined the various aspects of the underwriting industry, but she too was not very optimistic regarding the expeditious amendment of the law.

Cibulski-Havilio related how, during her first maternity leave, the head of her department at the ISA phoned her and urged her to come back to work within two weeks because of a "big new project that must be finished quickly - changing the underwriting system."

"My eldest son is now finishing first grade and the formulation of law has not been completed," said Cibulski-Havilio.

As for the nature of the changes to the law, Cibulski-Havilio said that even the state comptroller intervened in one of the stages of the legislation when he heard that the ISA intended to adopt the American underwriting system, which benefits close associates. Indeed, following negative affairs recently discovered in the United States, the ISA made a few changes to the Underwriting Bill.

These, however, are only some of the problems discussed at Monday's conference. The tax parity on foreign securities as of January 2005 and the consequent greater attractiveness of capital markets around the world for Israeli investors was one of the main topics of discussion, even though they were not on the program. The participants at the conference were apparently thinking mainly about themselves when discussing this, and less about the good of the investors.

Tel Aviv Stock Exchange Chairman Yair Orgler gave the most pessimistic forecast of all when he said, "Israeli companies will have nowhere to issue, and underwriters will have no work."

In answer to a question by Gross, who had been a partner to the conclusions of the Rabinowitz Commission on tax reform - which had recommended equalizing taxation - Orgler noted that representatives of the bourse had tried to prevent this but had succeeded only in postponing it until 2005.

The managing director of Clal Finances Underwriting, Tsahi Sultan, said the middle class of Israeli companies will have nowhere to raise funds because there will be no Israeli investors who will want to buy securities in Israel. Sultan feels there is room to allow a significant preference for investments on the TASE over those in other capital markets. "I am practicing my English in preparation for work at a foreign bank," said Sultan.

As for the power that underwriters will gain under the new law with respect to how much they will give and to whom, the managing director of Harel Underwriting, Popi Fatal says he would rather forgo the power "to give out checks." This is because there is no chance underwriters will withstand the pressures that will be applied to them by close friends. Fatal also spoke of the terrible threat of the equalization of tax rates that will hit the bourse in another eight months. "If we want a capital market in Israel we have to be protected."

Regarding the determination of a company's value for its initial public offering, Fatal said

he does not know how this will be done.

"We go to the secondary market and examine the price-earnings ratios of similar companies," he explains. "Let's say the market sets the price of a similar company at a profit-earnings ratio of 25. I will sell the new company at a profit-earnings ratio of 22."

Leumi Pia General Manager Director Michael Civier points out another problem facing companies considering issuing stock - particularly companies that are in demand - that creates a situation of inequality between the ordering bodies.

"Underwriters who are involved in an issue take advantage of insider information during the issue in order to find out the level of demand and in order to increase the size of the orders placed by bodies with which they are associated," says Civier.