Israel has seen a growing trend in debt initial public offerings by US and Canadian real estate companies with income-producing real estate as well as the listing of the bonds for trading on the Tel Aviv Stock Exchange.
In recent years, more than 30 such real estate companies have completed public debt offerings in Israel, the large majority of which were initial public offerings. These offerings have raised approximately NIS30 billion in total (equivalent to $9 billion). The offerings typically had interest rates ranging between 3% and 8% (unsecured bonds that are rated A locally with a five-year duration have been issued with a fixed coupon of 5% to 6%, unlinked to the consumer price index) and the debt was usually unsecured (most offerings were made without collateral; secured offerings were also made). The proceeds from these offerings are intended to be used:
- to refinance existing mezzanine loans (which are typically subordinated to real estate mortgages) and existing senior loans on secured offerings;
- to buy out minority interests in the assets in some cases;
- to acquire new assets; and
- for the issuer's general corporate purposes.
The Israeli corporate bond market features a broad range of investors, both retail and institutional, that benefit from an efficient market with low trading costs relative to corporate bond markets worldwide, in which the activity of institutional investors is mostly predominant due to high trading costs for small investors.
The common structure for these offerings is for holdings in several real estate assets (typically located in the United States and held by limited liability companies (LLCs)) to be transferred to a special purpose company, typically incorporated in the British Virgin Islands for tax reasons, which issues the bonds. The entity or shareholders (typically based in the United States) that originally controlled the real estate assets continue to control them through the BVI entity. The principal commercial advantage of this structure is that real estate companies can issue debt with respect to their entire real estate portfolio (or a large portion of it), rather than financing properties individually (which is the typical structure). As a result, the amount of money they raise increases substantially while in effect spreading the risk over multiple properties.
The primary financial advantages for international real estate companies raising debt in the Israeli market are:
- attractive interest rates; and
- the ability to raise comparatively small amounts of money in a bond offering, which is a particularly appropriate vehicle – in size and scope – for small-to-medium sized real estate companies.
In addition, Israeli credit rating agencies have provided relatively high ratings (between BBB+ to A) to these smaller US real estate companies compared to the US credit rating agencies, which would typically provide lower ratings to companies of such size, resulting in interest rates that are generally lower than the interest rates that small-to-medium sized real estate companies could find in the United States. Further, the offering expenses tend to be significantly lower in comparison to the cost of consummating a public debt offering in the United States.
The offering documents include features that are designed to address the principal concerns of Israeli investors resulting from the offshore structure of these offerings. The primary concern relates to the bondholders' ability to take action in the event of insolvency against the issuer and the real estate assets, which typically reside outside Israel. To address this concern:
- the issuer undertakes in the offering documents to subject itself to Israeli law and jurisdiction in the event of legal proceedings relating to the offering and the bonds; and
- the controlling shareholders and directors agree not to initiate insolvency proceedings against the issuer outside Israel or object to such proceedings being held in Israel.
Over time, the offering documents have come to include an increasing number of issuer covenants, including:
- those relating to the distribution of dividends;
- transactions with controlling shareholders; and
- in some cases, that the controlling shareholders provide the issuer with a right of first refusal with respect to business opportunities that could benefit the issuer.
Historically, issuers have agreed to be subject to Section 39A of the Securities Law, under which certain corporate governance and provisions of the Companies Law and Securities Law relating to transactions with controlling shareholders and tender offers are applied to non-Israeli companies that have issued shares to the public in Israel. Under an amendment to the Securities Law, Section 39A now also applies to foreign companies that have issued debt to the public in Israel.
Typically, the transaction structure involves a membership interest purchase agreement for transferring the ownership of the LLCs that own the real estate assets to the BVI company. Legal opinions are rendered by both BVI counsel (regarding corporate status and corporate law matters) and US counsel (regarding the transfer of ownership in the LLCs); in addition, a US securities opinion is rendered by US counsel to the Tel Aviv Stock Exchange.
Once the BVI company issues the bonds to the public in Israel, it becomes a 'reporting entity' and must comply with the Securities Law and certain Israeli corporate governance requirements – including, among other things, the obligation to appoint:
- two Israeli external directors;
- an Israeli independent director;
- an audit committee; and
- an internal auditor.
Once the company becomes a 'reporting entity' (immediately after the initial public offering), it must file annual, quarterly and immediate financial reports to the public in Israel, in Hebrew and in accordance with the Securities Law.
For further information on this topic please contact Boaz Noiman at Fischer Behar Chen Well Orion & Co by telephone (+972 3 694 4111) or email (firstname.lastname@example.org). The Fischer Behar Chen Well Orion & Co website can be accessed at www.fbclawyers.com.
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