Taking Stock / Azrieli Won, You Lost

The market is thrilled.

The Canadian billionaire, David Azrieli, the Shopping Mall King, is coming to the Tel Aviv Stock Exchange. His company, Kanit, is about to raise NIS 500 million through a bond offering to the public to finance its Israeli investments.

The figures Azrieli revealed are impressive. He came to Israel in the 1980s, and established his first mall in Ramat Gan. Now he controls a business worth between $600-to-$700 million that generates a gushing cash flow that can finance debt easily.

Menachem Einan, who has been quietly and modestly running Azrieli's business in Israel for the last 13 years, managed to navigate the Azrieli ship to safety through the upheavals and shoals of recession in the general economy and particularly in the real estate sector. Unlike most of Israel's other real estate giants, the Azrieli group didn't rely on land bought for pennies in the distant past. No: it relied on thoroughly understanding its business of building and operating shopping malls.

Even after three years of grinding recession and sliding private consumption, Einan can boast a rock-solid, highly-liquid balance sheet and strong-enough profits to allow the group to contend for the largest investments available in Israel.

Burned to a crisp

But the headlines trumpeting Azrieli's debut in Tel Aviv are not exactly accurate. In fact, he involved Israel's general public in his business more than a decade ago when he sold bonds to Bank Leumi's provident funds to finance some of his shopping malls. The malls had been incorporated through a joint company he set up with Leumi called I.C.

The press celebrated Azrieli's beautiful financial results this week, but TheMarker revealed that some of the half-billion shekels he's planning to raise is earmarked for buying back some of the bonds he sold to the Leumi provident fund savers a decade ago.

The concise prospectus prepared by Azrieli notes that his company had invested NIS 650 million in buying back shares and bonds in I.C. What it didn't note, but TheMarker explained, is that the adjusted value of the original investment was more than NIS 850 million, meaning that the Leumi provident funds lost an enormous NIS 230 million on its joint business with Azrieli.

Why is Azrieli, a billionaire and international businessman, paying Bank Leumi's provident funds just NIS 650 million for merchandise he sold to them for NIS 850 million?

Simple: Because he can. The structure of the deal he struck with the Leumi provident funds enabled him, after a protracted negotiation, to allow the funds to exit, albeit at a tremendous loss. A loss, that is, for the bank's customers.

The institutional investors managing Azrieli's money aren't about to waste time grasping the details of Azrieli's deal with the provident funds. Their time is precious: The stock market is sizzling, the IPO market is crackling, and the institutional investors are too busy snapping up bonds from anybody proffering them.

Naturally, no small part of the bonds they're gobbling will end up like that sorry deal between Azrieli and the Leumi savers: the latter will get burned to a crisp.

Hair on end

But the people managing other people's money aren't worried. They know that even in the worst-case scenario, it will take two or three years before anybody realizes they merrily snapped up junk without securing interest rates high enough to compensate for the risk.

They know that for two or three years they can get away with posting beautiful profits on paper from the bonds they're buying to boost their return rates in the short run. In any case, they won't be around to explain when the next bust comes, and the Azrielis of the business world will buy back their bonds at end-of-season prices.

Don't the investment committees realize that? Don't the analysts know how to price risk? In general, they do, but it's much more convenient to lose money slowly from an investment in bonds, drop by drop, over a long time.

Or as the world's most famous economist, John Maynard Keynes, once said about the difference between investing in stocks and in real estate: there is no real difference in the risk between stocks and properties. The only difference is that real estate isn't listed on the stock market, so you can't monitor its daily fluctuations. If real estate prices were to appear in the paper by the stock quotes, he said, our hair would stand on end.

We suspect that if the investors in Israel's provident funds, mutual funds and insurance companies really understood the risks they're being exposed to through so-called "solid" investment picks, of bonds proffering low interest rates, their hair would also be on end. And it wouldn't flatten down until they'd taken out every last shekel they'd invested.