Taking Stock / All's Well, but the Patient Died

Lessons learned: Zero. No conclusions were drawn.

Dorit Salinger, the chief executive of Maalot The Israel Securities Rating Company, which gave a blue-chip AA rating to the leasing portfolio of Car & Go six months ago, was unmoved by the company's default on its very first interest payment. "Maalot has no conclusions to reach from the case," she said Sunday.

Though Car & Go raised NIS 50 million from the public thanks to Maalot's especially high rating, though come November, Car & Go announced it couldn't make the interest payment, though Maalot was caught completely unprepared and scrambled to downgrade the company overnight from AA to D, which is short for "Default" - meaning Car & Go is going to stiff its bondholders - Maalot had "no conclusions to reach."

Why are there no conclusions to be reached? Because, Maalot says, it didn't grade Splendid, technically the owner of Car & Go, but rather the special-purpose company (SPC) set up to raise the money, to which the leasing portfolio had been transfered. That is a financial mechanism called "securitization."

Maalot rated the SPC according to its agreements and contracts. Maalot checked the SPC's leasing portfolio and its contracts with Car & Go, and rated them AA. That's the same rating that Blue Square Israel or First International Bank of Israel get.

If Maalot checked matters properly, then why is Car & Go defaulting on its debts five months later? Maalot blames the trustee, the accounting firm of Brightman Almagor, which didn't ensure that the money was being transfered from customers paying lease installments to the SPC. Brightman Almagor blames company management and is demanding a police probe.

In short, the operation succeeded but the patient died. The securitization succeeded, but investors aren't getting their money.

Since none of the bodies involved seem inclined to reach conclusions, we are reduced to reaching some of our own.

1. Maalot fell down on the job. The leasing industry has been whispering all year that Splendid, the company that sold the leasing portfolio, is in bad shape, that it's been making deals at a loss, that the churn rate of its chief financial officers is too fast, and that it's barely liquid.

For Maalot to settle for ranking only the company that actually received the leasing portfolios, while ignoring the condition of the company supposed to be handing over the money, may not work if the latter is under financial stress.

2. Brightman Almagor was asleep on the job. As trustee, its job included verifying that the money from customers leasing cars was transfered directly to the bondholders, not to Splendid. If Brightman Almagor discovered that the company was not transfering the money only on the very same day the money was supposed to be transfered, then it wasn't doing its job properly.

3. The managers of Car & Go performed brilliantly. They knew exactly what was the condition of the company, and they knew it probably couldn't pay its debts. But they found a great solution to their financing woes: they went to Maalot and Brightman Almagor, handed over a pile of papers and contracts, wrote exactly what Maalot and Brightman Almagor needed in order to give them top rating, and hurried to institutional investors to raise NIS 50 million.

4. Since Maalot refuses to reach conclusions from that and previous embarrassments, such as that A+ rating it gave to Dor Chemicals moments before the company admitted to massive losses and corrosion of its financial situation, then perhaps the institutional investors should reach conclusions of their own.

Maalot and Midroog are Israel's only rating agencies. Like all rating companies, they play a key role in the capital market. They amplify the information available to investors, sometimes providing essential knowledge based on confidential information the companies share with analysts. Over the years, Maalot has proved that it is not biased, even though it belongs to banks and brokers.

But Maalot relies on a handful of analysts who are supposed to examine and track dozens of companies and know their sectors inside out. The agency often relies on the companies' managements, who have a clear interest to hide unflattering developments. For instance, after the Dor Chemicals fiasco, Maalot explained that management didn't fulfill its commitments to the agency.

Inevitably, some of Maalot's scrutiny will only be skin-deep. Its little team of analysts is facing some of the most ferocious sharks on the business scene, people who know how to sell their story.

A note from Maalot

Since Israel's rating market is both small and young, the rating agencies have an inherent bent toward granting generous ratings. It brings in business.

As credit ran tight at the banks in recent years, Maalot's star rose skyward. You need money? Get a high rating from Maalot and run to squeeze the institutionals. An AA or AA- rating is practically a check in hand.

Billions of shekels have streamed from our pension funds to companies and their owners' pockets thanks to "notes" they received from Maalot.

This is where some of the people managing our money are making a mistake. They think a "note" from Maalot exempts them from checking themselves, of exercising prudence.

Why is that? Most institutional investors maintain investment committees manned by people mainly preoccupied with covering their rumps. They would rather lose money on a bond that Maalot rated highly than seek attractive investments uncovered by analysts.

Salinger may not be reaching conclusions; she knows that her ability to examine and analyze is limited. But the institutional investors, the ones managing our money, should reach conclusions. When a company's rating can plummet overnight from AA to D, when a company can be transformed from gold to junk in a blink, it's a sign that anybody settling for a low interest rate on any merchandise sporting a blue-chip rating is betraying his customers.