The bond market on the Tel Aviv Stock Exchange is one of the most developed and liquid in the world and is used by the business sector as an available and efficient financing alternative. The business sector raises significant sums of money by issuing negotiable bonds, some of which are used to recycle previous debts (at a better interest rate) and some of which are used to finance current activities and develop new businesses.
The low interest rates that prevailed in the economy starting in 2015 helped to jump a step in the annual bond raisings from a level of about NIS 30 billion, to over NIS 50 billion in the following years and to about NIS 80 billion per year in the last two years. Also this year, the recruitments are expected to amount to about NIS 80 billion.
Unlike most stock exchanges around the world, in Israel the bonds are traded as part of continuous trading on the stock exchange (and not off the stock exchange). Trading turnovers in corporate bonds on the stock exchange amount to an average of about NIS 930 million per day and are number 2 in the world.
The stock exchange calculates and publishes approximately 35 Tel-Bond indices that reflect corporate bond prices divided by market value, rating, linkage, term to maturity and industry classification. On these indices, approximately 265 basket funds and mutual funds with a total value of approximately 38 billion are traded on the exchange NIS.
Currently, approximately 685 series of corporate bonds with a total market value of approximately NIS 380 billion are traded on the Tel Aviv Stock Exchange, with approximately 83% of the series rated by one of the two Israeli rating companies “Maalot” and “Midrog”. 180 of the bond series are rated by the two rating companies. The remaining 17% of the series, with a total value of approximately NIS 21 billion, are not rated at all by any of the rating companies.
The rating of the bonds is intended to indicate the credit risks of the various companies and to assist the investing public in making investment decisions. The bonds traded on the Tel Aviv Stock Exchange are rated according to the local Israeli rating scale, with the highest rating being AAA (by Maalot) and Aaa (by Midrog). The investment level includes all A- ratings up to the BBB (by Maalot) and Baa (by Midrog) groups.
Bonds issued by banks (including COCO type bonds) and by insurance companies rated in the two highest rating groups. Lower ratings are considered a speculative investment level, and in the local market companies that receive an indication that they will be rated low will prefer not to publish the rating at all. Therefore, today there are almost no bonds that are rated in this type of ratings (except for the bonds that were rated at the time of their issuance with an investment rating, the companies ran into difficulties during the life of the bonds and therefore the rating company lowered the rating). About 90% of the bond series of the companies in the sector The rated reals are placed in the AA and A ratings, with the average series value in the AA rating being approximately NIS 760 million, while the average series value in the A rating is approximately NIS 420 million.
In the world, many companies usually issue with a speculative rating – according to the data of the international rating company P&S – bonds with a total value of about 5.4 trillion dollars, which is about 24% of the value of the bonds rated by them that receive a speculative rating – lower than BB. Of these, bonds worth 430 billion dollars are rated CCC or below. Some of the companies with the speculative rating have been downgraded there due to the deterioration of their business situation since their issuance, but some originally issued with this rating. Low-rated issues are customary in the period of low interest rates worldwide since they gave investors superior returns to bonds h in investment ratings.
The rating of the bonds is intended to indicate the credit risks of the various companies and one of the criteria for assessing the risk is the debt ratio. As expected, the higher the level of financial leverage of the companies, the lower their rating usually goes. Thus in joint stock companies the leverage increases from 63% in the AA rating to about 70% in the lower ratings. In companies that issued bonds only, the level of leverage rises to about 79% in unrated bonds.
About 65 companies that only issued bonds on the stock exchange and generally have lower equity than companies that also issued shares with the same rating. The equity of these companies rated A and below is on average about half of the equity of equity companies with a similar rating.
About 17% of the bond series are not rated at all, so their debt raising option is also smaller. These are small series that constitute only about 5% of the market value of corporate bonds. In this group, in contrast to the rated groups, the debt/balance sheet ratio of the companies whose bonds are only traded on the stock exchange – 79%, is significantly higher than the ratio in the stock companies in this group (70% ).
The most prominent branch is the real estate and construction industry, where among the 530 bond series of the real sector, more than 340 series were issued by 122 real estate and construction companies with a total value of approximately NIS 158 billion. There are 97 real estate and construction companies whose shares are traded on the stock exchange – 74% of them issued bonds to finance their activities.
About 230 of the series of real estate companies are rated AA (average series size about NIS 870 million) and A (average series size about NIS 400 million). About 80 series of real estate and construction companies are not rated (size average series of about NIS 130 million).
Another sector that stands out is the energy and oil and gas exploration sector with 17 companies that issued 48 bond series with a total value of approximately NIS 38 billion. The average series size of an energy company is approximately NIS 800 million – about 65% higher than the average series size of all The real sector.
**The review was written by the staff of the Tel Aviv Stock Exchange**