'Public Should Exercise Caution in Initial Mark Et'

Israel Securities Authority Chair Moshe Tery warns against overenthusiasm for the wave of public offerings hitting the capital market - even going so far as to say there is danger to the public in investing in new offerings. Tery calls on the public to exercise caution in buying into offerings and says there are currently quite a few offerings by "poor quality companies." A warning from a senior regulator against danger to the public in its investments is extremely rare and indicates that the ISA is very concerned by the current boom market in offerings.

Tery told TheMarker, "I call on the public to examine each offering very closely. Look at the company, its managers and its history. We are very worried by the fact that these things are no longer done today - and any offering gets bought. We are starting to see offerings by poor quality companies, including companies we ordered to emphasize certain very worrisome figures in their prospectus. Still, these offerings are grabbed up in their entirety. This is very risky."

According to Tery, most issues stem from excellent companies, but he is worried by the loss of choosiness which is allowing even lower quality companies to easily raise financing from the public. "We have 200 issues in line waiting for permission," Tery reveals. "This reminds me of not-so-good times," he adds, hinting at the TASE's 1994 bubble.

Aside from warning the public against buying into issues directly without being choosy, the ISA is also working on reviewing the investment considerations of the public's messengers to the capital market - portfolio managers and mutual fund managers. The watchdog plans to demand that portfolio managers and maybe also mutual fund managers publish their considerations in various offerings. In addition, portfolio managers will be required to get client permission in buying into offerings and will have to reveal to the client any connections they have to the company offering the security. ISA has other planned restrictions in the pipeline, too.

2006 was a record year for financing on the Israeli capital market as companies saw NIS 90 billion, about half in shares and half in corporate bonds. This outpaced any previous year, including the boom years of 1993 and 2000 (in real terms). Fundraising in 2006 was essentially twice the previous record set in 2005. The pace this year, by the way, is only increasing. In January 2007 alone, publicly traded companies raised NIS 10 billion, NIS 7 billion of which was in corporate bonds.

Capital market sources believe the primary problem in the initial market is actually in corporate bonds and not with shares. The issue process is motivated by the public's ever-increasing appetite for corporate bonds, which the public believes is a solid investment carrying little risk. For this reason, the public is injecting huge demand into mutual funds that specialize in corporate bonds, and these funds are the prominent buyers as companies issue paper. In November-January, corporate bond-oriented mutual funds raised NIS 6 billion, although the sum was heavily weighted toward January.