Africa-Israel Investments Ltd. (TASE:AFIL; Pink Sheets:AFIVY) bought back NIS 450 million worth of its commercial paper in November-December 2008. Capital market sources believe that the buyback was made at a discount of 5-10% of par value, which means that the company can report a capital gain in its upcoming financial report. The company reduced its outstanding commercial paper by about a third.
The buying back of commercial paper at such a large discount is a big deal and underscores the panic of institutional investors at the time.
Commercial paper is very short-term debt with a maturity of up to a few months. Large companies use it to manage liquidity. In addition to its short maturity, commercial paper has exit points where investors can demand immediate repayment in full. These exit dates usually occur once a week.
In the case of Africa-Israel, even though the institutional investors could have waited a short time for the next exit date, they preferred immediate repayment even at a discount of 10% on par value. This conduct is indicative of their panic and the utter loss of confidence even in the most solid securities. Another reason for the fire sale may have been a liquidity crisis at the investment institutions themselves at the time caused by the massive withdrawals from their provident funds.
Published by Globes [online], Israel business news - www.globes-online.com - on March 2, 2009
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