By Adv. Dotan Elnatan, Partner, Shibolet & Co.
As the laws of change indicate, the introduction of foreign entities seeking to raise debt in the Tel Aviv Stock Exchange (TASE) began with hesitance, not to say a criticizing approach. In current days we are witnessing the negative vibe replaced by a lively demand with the transaction volumes and level of issuers on the rise.
Responding to the increase in transaction numbers and volumes, the ISA recently published a legislative proposal calling to apply additional provisions of the Israeli Companies Law on such foreign bond issuers (mainly, to equate the legal status of such foreign issuers to Israeli public companies, with regard also to debt settlements).
To date, the majority of issuers are US companies and the existence of such transactions and their scope indicate there is a financial advantage for international Real Estate players in raising debt in the Israeli market, mainly comprising of attractive interest rates and high demands. In addition, due to the size differences between markets, the Israeli market provides higher ratings to the smaller US Real-Estate players seeking financing, compared to the US market where competition is greater and more favorable to much larger companies or REIT’s (Furthermore, it is only probable to assume that this will be the case with issuers from any other international market, such as the UK or EU). Another advantage lies in the more open approach of the Israeli capital market towards real-estate development business.
Under the structures built to facilitate a bond issuance to the Israeli market, several assets are transferred and gathered under a special purposed company which eventually issues bonds against a diverse portfolio of assets, which can better serve the debt (by materially reducing the risk as it diversifies, if not by other factors as well).
To date, the preferred course of action for US Real-Estate companies, involves the incorporation of a new company in the British Virgin Islands (BVI) , in which the relevant assets are relocated. In such way, the American controlling entity or shareholders are not exposed to any tax liabilities resulting from the transfer.
However, as the off shore SPC structure is adopted (by a US or any other foreign issuer), certain concerns of the Israeli investors have to be addressed in the design of such transactions. The most material and basic concern has to do with the Bond holders ability to act against a defaulting ‘off shore’ issuer. First, the geographical distance poses its own difficulties for bond holders wishing (when the need arises) to conduct legal proceedings at the domicile country of the issuer. More importantly, the conflict of laws between the Israeli and the various domestic laws applicable to the issuing company (depending on the place of incorporation) or the assets themselves (depending on the physical location of the assets), especially concerning liquidation and insolvency laws.
As time progressed, the Israeli market and the debenture issuing foreign companies devised remedies that allowed the welcoming of more and more transactions. Analyzing recent issuances of foreign bonds reveals an increase in interest rates (to annual rates of 5.5% – 6.5%) reflecting the market’s assessments and pricing of the risks and an effort to close the gap with the native issued bonds. Furthermore, the local institutional investors demonstrated increased involvement in the negotiations with the issuers and the bond’s trustee, prior to the offering to the public. These actions resulted in the implementation of various provisions in the Trust Deed and the bond’s terms, which are supposed to protect the bond holders and improve their position.
Finally, the Trust Deeds also include corporate-governance provisions addressed to render certain powers to the Bond holders, while subjecting certain corporate actions to their approval. As stated above, these measures have recently been reinforced as the ISA is seeking to establish rules and enforce corporate governance regulations under Israeli law upon foreign bond issuers. If the suggested regulations are applied, foreign entities wishing to offer their securities, including bonds, in Israel will have to adopt a substantial portion of the Israeli Companies law regulating the corporate structure of such corporations. Also, according to the proposed regulation, foreign issuers will be subjected to Israeli laws and regulations regarding arrangements and settlements between the company and its shareholders or creditors.
With the progress already made by investors and issuers themselves and the additional benefits investors are expected to enjoy under the proposed legislation, it seems that the Israeli market will continue to welcome new issuers, further contributing to the development of the local capital market.