Taking Stock / The Real Test

"Our real test will be in a few years, when the economy recovers, big transactions return, the stock market booms and competition over the big deals comes back."

When Shy Talmon, chief credit officer at Bank Hapoalim, told us that three years ago, the capital market was shuddering in crisis. Talmon was busy trying to breathe life back into dying businesses and to improve collateral. He certainly never thought the wheel would turn that fast.

The test has arrived; for Talmon, for his counterpart at Bank Leumi, Dr. Ehud Shapira, and for the bank credit committees, because Israel's loans market is roaring.

Three questions

Three particularly intriguing deals are going down these very days. The first was concluded two weeks ago, the second is in process and the third is still undergoing examination.

One: Two weeks ago billionaire Yitzhak Tshuva raised NIS 450 million through a bond issue by one of his privately held companies, through which he owns his controlling interest in Delek Group. The collateral behind the loan is Delek Group shares.

Two: Dudi Wiessman is currently working on raising half a billion shekels through a bond offering to buy out his partner's shares in Blue Square Israel.

And three: Capital market sources surmise that the Haim Saban-Apax-Mori Arkin consortium, which is taking over Bezeq, may finance part of the deal through a huge bond offering to institutional investors.

If you'd mentioned deals like these to the bankers two years ago, they'd have shied away. At the time, they were looking for any way possible to reduce their exposure to the big borrowers. Fine, let them borrow from the market, the bankers would have growled.

But the mood has changed and the capital market is willing to finance major deals these days. The bankers are changing their tune. Suddenly they want to lend the money: The potential for profit looks good and the risks look low.

Remember that Bezeq deal?

This may be the time to remind the bankers of the last time Israel's bond market was willing to finance a giant deal. It was back in August 2000, 10 months after Gad Zeevi bought 20 percent of Bezeq using bank loans.

The communications market hummed and thrummed in the year after that deal, Bezeq stock climbed sky-high, and Zeevi decided to exploit the surge to refinance his bank loans through an $80 million bond offering.

The bankers noticed the institutional investors lining up to lend Zeevi the $80 million, and they saw red. No way, they howled, and told Zeevi they'd happily lend him the money themselves. Based on the same Bezeq shares and collateral, they said, they would lend him $80 million as long as he forgot about finding money outside the banks.

Zeevi took the money: From his perspective it was OK if it came from a bank or a provident fund, he wasn't one to discriminate; he was happy to share his risks with all.

We know the end of the story. The stock market dived, Bezeq was not privatized (at least not then), dividends did not suffice to service the loan and meanwhile it turned out that, ahem, Zeevi's capital was not actually his own. Behind a Swiss signatory to Zeevi's account in Switzerland stood Mikhail Chernoy.

The receiver steps in

The Bezeq shares were transferred to a receiver on behalf of the banks. Three years down the line he's still stuck with the stock. At the end of the day the banks discovered that most of their loss wasn't from the original loan to Zeevi to buy the stock; it was from that $80 million they'd insisted on lending him at the height of the bubble solely to block the institutional investors from providing loans.

Some of the credit officers at the banks who approved the loan to Zeevi are still in place. Some are new and don't really know that story. But both will shortly be facing great temptation when giant deals start showing up and the institutional market - provident funds and mutual funds and insurance companies - rears up with wallet in hand.

This is also, of course, the great test of the institutionals, all those managers of other people's money, who are gradually assuming the title of financiers to corporate Israel.

Will they have the good sense to look at the long run, to evaluate risk, to create control mechanisms and demand appropriate risk premiums? That is the test.

There are three types of managers at the institutionals. Ones who have seen it before and vowed never to get caught in the trap, and new ones who weren't here and didn't shed the tears - they face a true challenge. And then there is the third kind, those who were around at the time but hell, at the end of the day they are managing other people's money and they make decisions based on the report for the next month or quarter, or their own bonus.