Sources inform ''Globes'' that the Bank of Israel will issue new proper banking regulations that will require banks operating in Israel to set clear leveraged credit policies. The Bank of Israel believes that "leveraged clients have reduced ability to react to changing economic conditions or unexpected events." It believes that since leveraged deals greatly exceed the norms in the relevant industry, "there are significant consequences on the banks' overall credit risk."
The Bank of Israel says, "There is an exaggerated reliance on borrowers' optimistic forecasts and on forecasts that predict the continuation of current positive conditions, such as long periods of growth. These forecasts are liable to cause a bank to base decisions on the granting of credit on the borrower's optimistic assessments and to assume that the borrower will always have free access to the market to obtain credit in the future."
"Globes" has obtained a draft of the new procedures, which state that when leveraged credit is granted, the bank will henceforth be required "to guarantee clear identification of the purpose of the credit and to use conservative collateral coefficients, while taking into account the extra risk derived from the lack of diversity and limited tradability."
The lending bank must also carry out an independent and conservative analysis of the liens provided by the borrower, analyze extreme scenarios when the credit is granted and regularly thereafter, conduct specific scenarios on the borrower's risk, and the risk in the industry in which it operates, and the borrower's business plan. The bank will also be required to conduct stress tests on the borrower's expected ability to meet its commitments.
Leveraged credit is considered especially risky because it is credit given by banks for the purpose of the acquisition of the controlling interest in companies, and it is granted at higher than usual financing rates. The main risk component is the practice of using the acquired company's shares as collateral for the debt. These shares on lien to the bank are supposed to service the debt through dividends distributed by the acquired company. The loans are often non-recourse loans, in which the sole collateral is the control shares in the acquired company.
Recent examples of leveraged credit is the loan given by Bank Leumi (TASE: LUMI) to Ilan Ben-Dov to acquired control of Orange franchisee Partner Communications Ltd. (Nasdaq: PTNR; TASE: PTNR), which has been fully repaid; and the loan given to Shaul Elovitch to acquire control of Bezeq Israeli Telecommunication Co. Ltd. (TASE: BEZQ).
The risk of leveraged credit is exacerbated during economic slowdown or recessions, when share prices plummet, resulting in the banks' liens losing value. Recent examples include Mordechay Zisser's Elbit Imaging Ltd. (Nasdaq: EMITF; TASE: EMIT) and Gil Agmon's Delek Automotive Systems Ltd. (TASE: DLEA).
Total leveraged credit in the banking system was NIS 20.2 billion at the end of June 2011, 30% of the banks' aggregate shareholders' equity. Total leveraged credit rose from NIS 19.6 billion at the end of 2010, and from NIS 19 billion at the end of 2009. However, since neither Bank Leumi nor Bank Hapoalim (TASE: POLI) disclose their leveraged credit amounts during the fiscal year, the actual current amount could be higher.
Bank Hapoalim has the greatest exposure to leveraged credit, at NIS 8.8 billion, including loans to Zisser, Agmon, Elovitch, the Bronicki-controlled Ormat Industries Ltd. (TASE: ORMT), Nochi Dankner-controlled Koor Industries Ltd. (TASE:KOR), Yitzhak Tshuva-controlled Delek Group Ltd. (TASE: DLEKG), and Lev Leviev-controlled Africa-Israel Investments Ltd. (TASE:AFIL).
Bank Leumi's leverage credit exposure is NIS 6.2 billion, and Israel Discount Bank's (TASE: DSCT) exposure is NIS 3.2 billion.
Published by Globes [online], Israel business news - www.globes-online.com - on November 13, 2011
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