On the eve of a $500 million offering overseas by Israel Electric Corporation (IEC), yields on some of its tradable bond series have reached more than 5%. Although the local rating agencies continue to award the company’s debt high ratings (Aa3 from Midroog, AA- from S&P Maalot), some institutions are already pricing higher risk into this investment.
”As part of a policy of cutting risk, we find it appropriate to exercise caution over this holding, in what for us is an unusual step,” Phoenix Group unit Shekel-AGIO warns institutions in a position paper on investment in IEC.
”All of us have pension money there, and it is important for us to inform our customers that we see higher risk,” Dr. Gideon Ben Nun, CEO of Shekel-AGIO Risk Management & Financial Decisions, explained to “Globes”. Ben Nun is a signatory to the document, along with Tal Shpielman, who is responsible for investment at Shekel-AGIO.
IEC, owned by the state, is traded on the stock exchange through eleven series of bonds. IEC’s debt totals NIS 63 billion, of which more than NIS 30 billion are in bonds.
Shekel-AGIO has a portfolio management license, and in addition it supervises the nostro investment portfolios of companies. In an unusual and precedent-setting step, Ben Nun and Shpielman have decided to issue a warning to institutions on the level of a particular security, rather than on the sector level. “IEC is a substantial holding in portfolios on the market, and some institutions have reached a level of investment in it of 10% or more of their portfolios. We decided that the time had come to raise a red flag, because the risk in the security justifies it. There is an illusion here about the risk level,” says Dr. Ben Nun.
The state is behaving like any capitalist
Ben Nun and Shpielman seek to “open the eyes of the institutions”, as they put it, about several points: “IEC has debt of NIS 4 million that falls due by the end of the year; relations with Egypt and the sabotage of the gas supply from there necessitate the purchase of dearer fuels, which is liable to lead to higher working capital requirements, and to pressure on the delicate liquidity position in which IEC finds itself today; the government has an interest in splitting IEC into three regional companies.”
Futhermore, they argue, in the light of the government’s pattern of behavior in the Agrexco affair, when it allowed the agricultural products exporter to collapse last year, leaving a debt of NIS 150 million to institutions, “it is impossible to know with certainty that the state will back IEC in repaying its debts. Without state support, liquidity is the weak link, given the immediate financing gap and a negative operating cash flow.”
According to Ben Nun, following the warning about IEC’s position, which was written two months ago, the institutions to which it was sent have taken various courses of action. Some have reduced their exposure to the company’s bonds, while others have remained with the same holdings. It should be pointed out that the two rating agencies, Midroog and S&P-Maalot, cut their ratings slightly last year, but, as mentioned, their ratings remain high, the main reason being the fundamental assumption, prevalent among most institutions as well, that the state will stand behind the company’s liabilities in an situation.
Ben Nun, a 20-year veteran in the capital market, is more cautious about this. “The government and the Ministry of Finance’s behavior in the Agrexco affair represent a signal to the market that the state will not blindly take responsibility, and will not always serve as a last resort for companies in its ownership. It rather behaves like any capitalist who makes a ‘haircut’, and that is the biggest warning light.”
Published by Globes [online], Israel business news - www.globes-online.com - on January 30, 2012
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