Securities Authority Eases Way for Big Debt Arrangements

The Israel Securities Authority is expected to announce a decision that will speed up the debt restructuring process for big Israeli companies.

The Israel Securities Authority is expected to announce a decision that will speed up the debt restructuring process for big Israeli companies, particularly Africa Israel Investments and Zim Integrated Shipping. A team of ISA officials have been debating the conflict of interest issue in the debt arrangements, as well as the circumstances under which institutional investors who are also bondholders will not be allowed to vote at general shareholders assemblies.

The ISA has not yet completed the drafting of its principles on this issue, but one of the team's main conclusions is that the ownership of bonds from several bond series issued by the same company will not be considered a conflict of interest. Without this new position, many institutional investors that own bonds from several series would not be allowed to vote on debt arrangements at all. The conflict of interest questions regarding institutional investors are at the crux of deliberations concerning debt arrangements for two big companies, currently under discussion in the capital market: Africa Israel and Zim. In Africa Israel's case, matters could have been particularly complicated, as the company has 13 negotiable bond series.

The ISA determined that there is a difference between a personal conflict of interest (a connection between an investor and a controlling shareholder in a company) and an internal conflict (when a company owns several securities of a business facing financial difficulties).

In terms of personal conflict of interest, the ISA plans to institute a strict ban against anyone connected to substantial shareholders from voting at assemblies convened to decide debt arrangements. For this reason Bank Leumi is barred from participating in shareholder assemblies deliberating Zim's debt restructuring, as the bank has an 18% stake in The Israel Corp., Zim's controlling shareholder, and has also loaned money to Zim.

When a company has an internal conflict of interest, on the other hand, the ISA's policy will be more lenient. The ISA will not, for example, ban institutional investors from voting on debt arrangements, even if they own several short- and long-term bond series from the same company, as is the case regarding Africa Israel's institutional bondholders.

ISA officials believe it is impossible to disqualify the voting rights of institutional investors due to such a conflict of interest, as almost all the bondholders would be disqualified. The ISA is therefore formulating a position whereby the institutionals will be allowed to lead debt arrangements at companies in which they own several bond series.

Even so, the ISA is likely to include one reservation within this lenient position, concerning investors who are both shareholders and bondholders. In fact, the ISA has essentially already decided its position on the matter, as part of its regulations of the activities of credit officers in the bond market. The regulations state that a conflict of interest regarding a shareholder who is also a bondholder will be determined by the investor's relative holdings in the two types of securities.

The ratio determined by the ISA is 70%. Thus if shareholders must infuse a company with cash to pay bondholders as part of the debt arrangement, and a shareholder who is also a bondholder would receive NIS 0.70 of each shekel he approves for transfer to bondholders, such a shareholder would be considered as having a conflict of interest. If a bondholder were to receive less than NIS 0.70 from every shekel he approves as a shareholder, this would not be a conflict of interest.