Israeli bond proposal threatens to curb borrowing by US real estate companies


U.S. real estate companies that have borrowed billions of dollars from the Israeli bond market in recent years face new rules proposed by the Israel Securities Authority that would tighten the tap.

The rules would change the way bonds issued by many foreign companies are rated in a way that would discourage Israeli mutual funds, a dominant market player, from buying them, according to market participants.

“You basically mark an ‘X’ across the entire industry,” said Nadav Berkovich, analyst at IBI Investment House Ltd.

The AMF is proposing the change in response to high-profile defaults by US bond issuers. More recently, All Year Holdings Ltd., a Brooklyn real estate owner who is one of America’s largest issuers of Israeli bonds, suffered heavy losses and its bonds were delisted from the Tel Aviv Stock Exchange.

The Authority said earlier this month that All Year was under investigation. Representatives for the whole year did not respond to requests for comment.

About 30 U.S. real estate companies have raised more than NIS 18 billion, or $ 5.5 billion, in the Israeli bond market over the past decade, analysts say. While the Israeli market has been open to all foreign issuers since 2008, private American real estate companies have used it the most.

Part of the reason is that most private real estate companies are unable to borrow in the US bond market at the corporate level, although they are able to sell bonds backed by specific properties. .

American real estate companies also liked the Israeli bond market because they can borrow there at lower interest rates than the United States. The issuers have included big names like Silverstein Properties Inc., the developer of the World Trade Center; Associate Cos., The developer of Hudson Yards in New York; and Extell Development Co., a developer of ultra-luxury condominium skyscrapers.

Most borrowers have met all of their obligations and many are critical of the proposed settlement. They say the Israel Securities Authority is overreacting to a few bad deals.

“This is silly,” said David Lichtenstein, managing director of developer Lightstone Group, which has borrowed around $ 400 million from the Israeli bond market. “Imagine if the United States closed the stock market after Enron.”

A spokesperson for the Authority said the new foreign bond market is “a blessed development” but also needs to be heavily supervised “because of its particular complexities and unsuitable risk profile. to certain investors ”.

The market had its first black eye about two years ago when bonds issued by Starwood Capital Group backed by a portfolio of shopping centers defaulted. An Israeli court appointed a trustee to run the company last year, according to Dror Miller, a trader for Oportod Delta, an investment firm involved in one of the pending class actions over the sale of the bonds.

A Starwood spokesperson declined to comment.

The Authority has given interested parties until April 21 to comment on the draft regulation. If they become final, they will come into force next January.

If the proposed regulations go into effect, US and foreign companies can still issue bonds in Israel. But bonds issued by most U.S. real estate companies would score below the investment grade, putting them out of reach for many mutual funds, according to lawyers and Israeli market participants.

“People have been burned,” said Amnon Lehavi, dean of Harry Radzyner Law School in Herzilya, Israel. The authority “fears that the funds are not prudent enough,” he said.

Extell is currently marketing a new issue of around NIS 150 million, according to market participants. In addition, Kushner Cos., The company controlled by the family of former Trump administration aide Jared Kushner, explored bond issuance in Israel. If the settlements become final, the two companies would likely have to pay a higher interest rate if they close the deals, they say.

Other US issuers say they will borrow elsewhere if Israel becomes too expensive. The Israeli market “has been a pleasure to deal with. We have met our obligations, ”said Lichtenstein. “It was really just one or two people who turned the situation around.”

Write to Peter Grant at [email protected]

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