The Rescheduling of Indebtedness of Large Israeli Companies

2013 was the year when repayment obligations finally caught up with some of Israel’s largest corporate borrowers.

The main stories in Israel’s business press throughout the year related to the rescheduling of indebtedness of some of the country’s largest companies. The highest profile instance was undoubtedly IDB Holdings Group, followed closely by the Elbit Imaging case. The latest instance is ZIM Integrated Shipping Services Limited, Israel’s national shipping line. In each case, the controlling shareholders of a heavily leveraged public company lost control of that company after a protracted legal battle or lengthy negotiations. At the beginning of 2013, Amendment 19 to Israel’s Companies Law introduced a detailed set of rules dealing with “corporate rehabilitation”, similar in many aspects to Chapter 11 of the US Bankruptcy Code. These new rules have been rapidly scrutinised by the parties to the rescheduling negotiations.

A noticeable feature in all these cases has been the high level of activism on the part of public bondholders. Traditionally, public bondholder debt has been viewed as an easy source of corporate finance and public bondholders have been relatively benign. As a result of much public criticism of the workings of Israeli capital markets, the conditions under which debentures are issued to the public by corporate borrowers are now much stricter, both in terms of covenants and in terms of the provision of security. Furthermore, after being criticised for their inactivity in protecting the interests of the public, bondholder trustees and representatives have shown themselves to be militant creditors in the past year, often targeting the controlling shareholders of large corporate borrower groups.

Increased Activity of Non-Banking Financial Institutions

Another development in 2013 has been the increasing activity on the part of non-banking financial institutions (insurance companies, pension funds and the like) in the lending market. Traditionally, institutional lenders had tended to play a minor role in larger financings co-ordinated by the Israeli banks. In light of the limitations on bank capital and the high level of liquidity of non-banking financial institutions, institutional lenders are taking a leading role in lending, particularly in the corporate and real estate sectors. In its interim recommendations, the Goldschmidt Committee, established in 2013 by the Controller of Capital Markets at the Ministry of Finance to consider the standards necessary for the private lending activities of non-banking financial institutions, expressed support for lending by “institutionals” in addition to their traditional activities in the area of traded debentures. However, the Committee recommended a high standard for corporate governance in approving and monitoring such lending.

Promoting Competition in the Banking Market

In March 2013, a Committee established under the chairmanship of the Supervisor of Banks at The Bank of Israel to encourage increased competition in the banking sector, submitted its final recommendations, namely that competition be promoted by the introduction of a variety of new players. Financial institutions such as pension funds should be encouraged to lend to households and to small businesses. The Committee suggested that, in order to avoid the prohibitive entry costs involved in establishing a new bank, internet banking should be encouraged (for example by allowing the opening and closing of accounts via the internet). The establishment of an internet bank is regarded as a direct route for competition with the existing powerful banking entities in Israel. Likewise, the Committee recommended supporting “social banking”, viewing a co-operative bank as a welcome social initiative, likely to encourage competition within the banking system. It has called upon the Department of the Supervisor of Banks to support such an initiative, both by easing existing regulations and by offering suitable guidance.

Late in 2013 the Bronfman-Schron Group announced that it was selling down its controlling interest in Israel Discount Bank Limited. This decision triggered for the first time the new rules introduced by the Bank of Israel to decentralise the control of Israeli banks. Under these rules, as soon as the controlling shareholder of a bank starts a process to divest itself of its controlling block of shares, the Bank of Israel will effectively ensure that there is no controlling shareholder (even if the prior controlling party remains the largest single shareholder or shareholder group in the bank), until such time as a new controlling shareholder or control group obtains a control permit from the Bank of Israel. Israel Discount Bank is the second bank in Israel to operate without a clearly defined controlling shareholder. Bank Leumi has been operating under such an arrangement for some time, as the State of Israel could not find an acceptable buyer willing to acquire its controlling stake in the bank. However, Israel Discount Bank is the first instance where a centralised control block has been decentralised. One of the main provisions in the recently enacted law for the promotion of competition and reduction of concentration is to separate ownership of “Significant Real Entities” and “Significant Financial Entities”, with a transitional period of up to six years. These new rules may lead to a change of control in a number of Israel’s major banks in the foreseeable future.

[Originally published in the Chambers & Partners Guide]