Knesset Study: Big Firms Borrow Too Much, Pose Hazard

Israel’s biggest companies are too highly leveraged, which means − they borrow too much, and present a hazard to the economy as a whole, concludes a study by the Knesset’s Research and Information Center.

Zadik Bino.
Tomer Appelbaum

The six biggest business groups owed the banks NIS 72.3 billion as of year-end 2008, the study found, while total bank loans at the time to the entire Israeli business sector totaled NIS 277.7 billion.

In short, nearly a quarter of all bank loans as of year-end-2008 had gone to just six business groups. Total bank loans to small businesses at that time was NIS 57.5 billion, less than that given to the Big Six.

Sheri Arison: Owns Hapoalim.
Ofer Vaknin

The study, conducted by Ami Zadik and Tamir Agmon, was commissioned by Knesset member Fania Kirshenbaum of Yisrael Beiteinu, who chairs the subcommittee on insurance. The report is based on analysis by the Research and Information Center of data collated from the Bank of Israel and the banks themselves.

The report did not name the big six business groups, explaining that the Bank of Israel hadn’t either. But the report is just in time for a debate scheduled for next week in the Knesset Finance Committee, on the topic of the economy’s domination by a handful of powerful business entities.

Advantages of size

Yet that figure for 2008 constitutes an improvement against the year before, the study’s authors found. In 2007, total credit extended to the big business groups came to NIS 97.9 billion. The drop in 2008, to NIS 72.3 billion, was because of the outbreak of the global economy, they explain. That erupted in September 2008.

Faina Kirshenbaum

The study concludes that in December 2008, the six big business groups were responsible for 17.5% of all outstanding bank loans, down from 24.4% in December 2007.

Zadik and Agmon ascribed the large proportion of credit to the big companies to three main reasons. The first is advantage of size, which motivates the banks to lend to these big bodies. A second is that the borrowers control most of the banks anyway. For instance, though no names are named, Shari Arison’s business group owns the controlling interest in Bank Hapoalim. Matthew Bronfman owns the controlling interest in Discount Bank. The Ofer and Wertheim families control Mizrahi-Tefahot Bank and Zadik Bino not only owns the controlling interest in the Paz Oil group: He also owns the controlling interest in First International Bank of Israel ‏(Beinleumi‏) and in Bank Otsar Hahayal ‏(which used to belong to Bank Hapoalim‏).

The third reason is the tight business relations between the business groups, postulate Zadik and Agmon.

On that advantage of size, both the banks and institutional investors ‏(insurance companies and the like that also extend loans to companies‏) see an advantage in lending large amounts to a single borrower. The upshot, write the authors, can be inefficient allocation of resources, depressing economic growth and the greater good of the public.

The ruling families and the risk

“About 20 business groups, most of them family-controlled, control 26% of Israel’s publicly traded companies and almost 50% of the combined market capitalization of the public companies,” write the authors. The families control their empires through pyramid-like structures.

Moreover, the finance-sector companies in these groups tend to be mature in age and size. They are characterized by low growth rates − but very high leverage, which means, they borrow heavily. They therefore pose a higher risk than the non-leveraged companies, write Zadik and Agmon.

As for the systemic risk that the great business groups pose, Zadik and Agmon claim that their close affinity to the banks worsens the banks’ own credit risks. The big business group are closely tied together, through complicated inter-group relationships, as seen in co-ownership of ventures, for instance. It is also evident in the composition of boards of directors, say Zadik and Agmon. That can impair the quality of information provided to shareholders from the general public, and impair transparency as well, they warn.

What if Uncle Yossi fights with Cousin Rina?

Yet another problem is that these sprawling business empires tend to be run like family farms. And that in turn can mean that the control, ownership and management of giant firms can boil down to the nature of relations within the family − and the management skills of individual people, mainly in second generations.

The concentration of vast economic power within control pyramids can even pose a threat to democracy itself. The bottom line is that wealth has influence over governance, Zadik and Agmon conclude.

Three characteristics may turn business groups into convenient tools to wield political influence, they say.

First of all, the concentration of power can enable a small number of families to achieve the clout to achieve their selfish political ends, or pursue the agenda they choose undemocratically.

Second, this concentration of power can be achieved at a relatively low investment. The business families borrow vast amounts of money but don’t necessarily put much of their own wealth into the companies; in other words, by putting their pension savings into the hands of institutional investors for management, the public of investors is funding the political ambitions of the rich families. The public is giving the families the means to pursue their own ends.

Thirdly, the big businesses operate largely free of fear of hostile takeover − which brings stability that is key to establishing long-term relations with government.

Ten groups, 30% of the market value

A study by the Bank of Israel into 650 publicly listed companies on the Tel Aviv Stock Exchange found that between 1995 and 2005, the ten biggest business groups were responsible for 30% of the aggregate market capitalization.

As of year-end 2009, the market capitalization of the 16 biggest business groups was NIS 349 billion, or 49% of the total market cap of all the listed companies. Though Israel has joined the MSCI developed nations index, the concentration of economic power in Israel is typical of developing nations, wrote Agmon and Zadik. The degree of concentration of control over publicly traded companies in Israel is 30%, compared with 3% in Japan, 4% in Britain, 11% in Spain, 15% in Ireland, 20% in Italy, 21% in Germany and 29% in France.

If it’s any comfort − albeit possibly cold comfort − the level of concentration in Sweden is 50%.