The outbreak of inflation in Israel and around the world and the interest rate hikes that followed in central countries put the global stock markets in the spotlight. Since the beginning of the year, these have shown price decreases, with the local Tel Aviv-125 index already losing about 5% of its value, while the American S&P 500 shows a 20% drop (or 6% in shekel terms).
● Not only Katzman: bonds of Tzachi Nahmias, Hanan Mor and Barak Rosen are flirting with the danger zone
● Sharp declines in Haim Katzman’s securities; The bond has a double-digit yield
But beyond the stock market, the local corporate bond market has also been turbulent in recent weeks, especially the more risky ones. These are bonds of Israeli companies with a low rating or no rating at all, as well as of American real estate companies that are perceived by local investors as more risky, even if they were allegedly assigned a proper local rating by S&P Maalot or Midrog.
If at the beginning of February of this year there were still only two companies on the Tel Aviv Stock Exchange whose unsecured bonds traded at double-digit junk yields to maturity (minus companies that are practically insolvent), now the situation is completely different. In the shekel channel alone, on Thursday, at least 12 companies were counted whose bonds carry double-digit yields, and another 4 are already approaching this. At the same time, in the linked shekel channel, 4 companies were traded with index-linked double-digit yields, and two more that are considered such in shekel terms (under the assumption Inflation of 2%-3% per year.) In other words, from the amount of junk bonds of only half a billion shekels (minus the bonds of insolvent companies), the amount of this debt reached more than 10 billion shekels.
For investors who purchased these bonds at the beginning of the year, these are losses that can reach tens of percent. The two that won the most headlines this week are the yielding real estate company G City and the parent company Norstar and this is due to the high financial debt of the entire group, which is estimated at more than NIS 19 billion.
However, several other companies have recently been blacklisted, including at least nine foreign companies operating in the US real estate market, most of which were established as “empty boxes” in which assets were placed against taking on debts. These companies scare local investors in times of crisis, and for good reason. Some of them, such as Ol-Yir and Strowood West, were abandoned in recent years by their owners, after they raised billions of shekels here at attractive interest rates for unsecured debts.
Gaps in perception of reality
A fresh and extreme example from the present time is bonds A’ of the Hertz Properties company, which traded on Thursday with a decrease of about 10% and completed a 26% drop since the beginning of 2022, to a price of 70 shekels which reflects the bond’s annual yield to maturity of 37%. The bond, it should be noted, still receives an A3 investment rating from Midrog.
Beyond that, in the second quarter summary reports published at the end of August, there was no warning, comment, or attention drawn from the company’s accountants. Moreover, the company’s board of directors even determined that it meets all the financial standards to which it is obligated, and that “there are no warning signs in the company.”
In the first two months of 2023, Hertz Properties is supposed to pay 37.5 million dollars to holders of Series A and Series B. The company claims that they are considering sales and/or refinancing of assets later in 2022, which should yield an amount that exceeds the bond payment.
Hertz Properties, which has equity capital of approximately 150 million dollars as of the end of June, is just one example of the gaps in the perception of reality that have recently opened up between the capital market and the real market. So is the risk that the investors see before their eyes too high, or is it precisely the danger that is intensifying as a result of the macroeconomic changes that will soon be reflected in the financial statements.