By Alon Harnoy, Moty Ben-Yona & Ben Zion Ferziger
In the last few years, large debt issuances by American real-estate groups have become a familiar sight in the Tel Aviv stock exchange. American real-estate owners and developers have been flocking to the Israeli stock market, seeking funding for their overseas projects. Since 2008 companies have issued Israeli bonds in a total amount exceeding $1 billion. The trend seems likely to continue, as more companies are expected to issue new series of bonds, expand existing series or examine the possibilities of other issuances in Israel. What market conditions caused the emergence of this phenomenon? And how can your real-estate business or client benefit from this trend?
The answer lies at the intersection of supply and demand: a tremendous demand for cash on the part of the American real-estate entrepreneurs, met by the availability of a relatively low-cost liquidity in the Israeli bond market.
The current Israeli bond market is liquid. Interest rates and issuance costs are relatively low, enabling companies with good credit to sell corporate bonds at an interest rate of 4% to 5% – often less than half the interest rate they would pay for a comparable loan in the U.S. through the more traditional course of mezzanine financing. Compared to mezzanine loans, which can charge up to 15% or even 20% in interest, lending money in Israel at an interest rate in the 4% to 5% range is a bargain.
In addition, recent changes in the regulation of Israeli institutional investors have created conditions more favorable for large Israeli investments in foreign debt issuances. Combined with the fact that foreign corporate bonds are being offered at an interest rate 200 basis points higher on average than the equivalent government bonds, these changes have led to an increased Israeli interest in foreign corporate bonds. Particularly high in demand are bonds backed by properties located in relatively safe havens like New York City. Israeli investors – mostly institutional bodies, but also mutual funds and high net worth individuals – are eager to gain exposure to the booming New York property market and to gross the higher yields this market offers.
Israeli market conditions are particularly attractive for smaller real-estate owners unable to sell corporate bonds in the U.S. In Israel, a mid-size real-estate firm looking for alternative funding may find opportunities that only large corporations have here in the U.S. A typical funding for an Israeli bond deal ranges between 150 and 500 million NIS – small by American standards, but evidently still big enough to attract Israeli investors. As a result, small to midsize American companies are able to raise funds more successfully in the Israeli market than in the larger and more conservative American market.
With that said, unfortunately, not every real-estate related corporation matches the appetites of the Israeli investors. A company must meet a few basic characteristics before it considers issuing debt in Israel. Previous successful issuances were of securities related to companies with holdings in yield-bearing properties such as residential buildings or commercial real-estate properties. In addition, the issuing companies have had an equity value of at least $150 million, a good debt service coverage ratio and at least a 30% ratio between equity and the total balance sheet. Finally, it should be noted that Israeli investors typically expect the bonds to be issued at a rating no lower than an “A” (according to the local Israeli rating).
When selecting to raise funds in Israel, real-estate entrepreneurs from America are expected to follow the Israeli real-estate companies’ leveraging model. While in the United States it is common to hold each project in a separate special purpose company directly against the debt that financed it, in Israel the assets are funded by a combination of the owner’s capital and bank leverage and then held together by an intermediate holding company. The bonds issued then collectively serve as a second layer of leverage for the company, and the debt’s payoff is expected to derive from the revenue from all of the properties in the holding company. Accordingly, American real-estate entrepreneurs are expected to establish a real-estate holding company to incorporate the assets for which they seek funding.
In conclusion, issuing American real-estate bonds in the Israeli stock market is an opportunity to tap into a reliable market offering a relatively cheap source of liquidity. There are, however, inherent differences and challenges for which a company must prepare in order for the issuance is to be successful.