Even without official statistics, the trend on the ground is clear: more and more companies are getting into financial difficulties and turning to insolvency proceedings. Real estate companies, high-tech companies, even defense companies. No-one can evade the economic situation. What in the past was confined to this or that sector undergoing a shake-up of its market is now everyone’s problem. Lawyers acting in insolvency proceedings tell of a growing phenomenon that has left no industry untouched.
In recent weeks, there have been reports of a number of companies that have applied to the courts after encountering financial difficulties. The Anise health food chain, Aura Smart Air, project control technology company Constru, environmental research company Danieli Basviva, real estate developers Rom Kineret and Tsabarim, and defense company Avnon, are just a few examples of companies in a business tailspin they hadn’t foreseen.
"What we see in the press today is just the tip of the iceberg," says Adv. Idan Miller, manager of the insolvency and corporate recovery practice at law firm Barnea Jaffa Lande. He says that there is a widespread phenomenon of quiet debt settlements that go unreported, which serve as indications of the situations of other companies as well. "What is worrying about the this trend is not just the rising numbers, because we have seen waves of company insolvencies before, but the range: retailers, contractors, high-tech companies, defense procurement. The range is very wide; it’s not just happening in one field, but in all companies, of all kinds."
Why particularly now? The answer, the lawyers believe, lies mainly in the rise in interest rates, but not just that. The situation in Israel’s legal system and the uncertainty that that generates is leaving its mark. "The two immediate factors affecting the situation of companies are the high interest rate environment and the negative sentiment in the market," says Adv. Rafi Shapiro, co-manager of the commercial department at S. Friedman Abramson & Co. "The high interest rate environment leads to a heavy burden on companies’ activity. Those without sufficient reserves get into difficulties and cannot finance their activity, and, no less significantly, cannot finance growth and renewal."
In the real estate sector, for example, the damage is reportedly pretty significant, and a tough winter is predicted. More than any other sector, because of the huge investment required in each project, the real estate development industry needs loans from banks and other institutions like air to breathe. So when the Bank of Israel’s interest rate has jumped within a year and a half from practically zero to 4.75%, the optimistic forecasts presented by many developers back then become obsolete. It’s a lethal combination of huge financing expenditure in the new conditions, and a sharp decline in demand for the projects because of the interest rate and inflation, making the cash flow challenge particularly tough.
"Take the situation of a contractor who buys land, and eighteen months to two years go by before he receives all the permits and starts building. In the past eighteen months, the interest rate to which he is exposed has doubled, and sometimes more than that," says Adv. Eli Shimilevich, head of litigation at Yigal Borochovsky & Co. "A contractor who eighteen months ago benefitted from an interest rate of prime plus 1%, which was an effective rate of 3%, could now be paying 8% interest. Multiply that by tens, and sometimes hundreds, of millions of shekels, and you get a very substantial, and unpredictable, addition to costs."
Low spirits
As mentioned, negative sentiment in the market has also contributed greatly to the situation. Shapiro believes that the danger it presents, in combination with high interest rates, is extreme. "The lack of certainty, together with the damage to the business mood, engenders stagnation at many firms, which is damaging to business activity," he says. "That creates a snowball effect that, unless it is dealt with quickly, will lead to more and more companies shifting their businesses out of Israel. That will harm companies with a business focus within the country. Business is a mirror of the national mood, and so national consensus (on changes to the legal system, N. S.) will lead to an acceleration of local business activity."
The situation is particularly severe in the high-tech sector. "As far as high-tech is concerned, there is a special aspect that derives from the legal situation in Israel and the shortage of investment," explains Adv. Shimilevich. "High-tech companies, by their nature, are financed decisively by investment in their early stages. The legal revolution, whether you support it or oppose it, has caused a halt in investment in the sector."
Attitude of the banks
Another factor affecting the economic situation is the Covid-19 pandemic. "Because, during the pandemic, companies sustained losses and the banks gave them breathing room, we are now finding that they are less flexible, and are cutting off credit lines when they see companies failing to abide by their agreements with them," says insolvency lawyer Adv. Eitan Fishman. "That, together with the interest rate, accelerates the process of filing insolvency petitions and creditors’ arrangements. Unfortunately, we encounter many companies that say to us, ‘The banks reduced our credit limits drastically from one day to the next.’"
Adv. Miller, on the other hand, actually finds patience on the part of the banks, by contrast with other credit providers. "In the proceedings on which I have advised in the past few months, I have found the traditional providers and institutions like the banks becoming more mature, and showing great patience," he says. "The banks realize that a business that isn’t given an opportunity to be sold, will simply collapse."
Scared investors
Insolvency is a last resort for companies. Even today, when the law allows companies to apply to the court not just for liquidation but also so that the court can aid them, the preference is of course to find investors or buyers, and that, at least as far as foreign investors are concerned, is not simple at all. "What we have been experiencing in the past few months is difficulty in finding investors," Miller says. "Investors are fearful of taking a position in large investments, and in investments in Israel."
He says that what at one time would have stopped before court proceedings began, because an investor would have been found to buy the company, now reaches the insolvency stage. "I can testify that there is a significant decline in interest in Israel. It’s a trend that I have identified in the past three months. The local market doesn’t interest them as much as it did. No-one has said to me that it’s because of the situation, but you can see that interest has declined."
Opportunities despite everything
The current picture is negative; that comes up again and again in conversations with lawyers involved in insolvency proceedings. Some say that they have never encountered a situation like the present one in all their years of practice.
Alongside this, however, there are also those who see light in the darkness. "The existing environment also leads to another phenomenon, basically a welcome one, of the closure of companies with problematic activity that have managed to finance themselves and keep going, but which are left exposed and reach a situation of insolvency," says Shapiro. "Together with a certain cleaning out of the market from problematic companies carrying disproportionately high risk, there is an opportunity for regulators to identify phenomena and to try to provide solutions for areas of business that flourished when interest rates were low," he says.
At the same time, in the local market, which is not dependent on foreign investment, there is considerable merger and acquisition activity. "Opportunities are being created at the present time," says Adv. Almog Doron, a partner at Yaacov Salomon, Lipschutz & Co., who heads the firm’s mergers and acquisitions department. He say that there has been a great deal of movement of late in company acquisitions, with many family companies and small companies being swallowed up by large corporations.
Published by Globes, Israel business news - en.globes.co.il - on August 28, 2023.
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