It seems that in recent weeks hardly a day goes by when the impact of the increase in interest rates in the economy on the public and the business sector is not in the headlines. The financial pressure on the households that have taken out large loans to purchase houses and cars, as well as on companies leveraged by credit, is increasing, to the point of concern about their ability to repay the loans.
● The signs that show: an increase in the proportion of households in Israel that have difficulty closing the month
● The zero interest rate has disappeared, and with it the celebration of loans Interpretation
At the Tel Aviv Stock Exchange, the investors in heavily indebted companies that operate mainly in the real estate sector recently felt this G City (formerly Gazit Globe) by Haim Katzman, Israel Canada or Hanan Mor whose shares and bond series they issued plunged by tens of percent, as well as companies operating in the field of non-bank financing, which may suffer from debt repayment difficulties for some of their customers.
And so, taking out loans and increasing financial leverage for the purposes of acquisitions and business expansion during periods when credit is cheap and inviting, could quickly become a millstone when times change. And while the climbing interest rate puts in trouble those who equipped themselves with huge loans in the happy days that were here until recently, there are also those who can smile in the face of the developments – those businessmen who shied away from high leverage even during the prolonged period of a zero interest rate environment. For them, the saying attributed to the legendary investor Warren Buffett is engraved in stone: “When the tide goes out, you see who swims naked.”
What is leverage?
A loan that allows an investor – an individual or a business – to purchase assets or shares for an amount higher than the equity he holds in his hand. For example, taking out a mortgage to buy an apartment is leveraging the equity through getting a loan from the bank. Leverage makes it possible to obtain a greater profit when the price of the asset or stock rises, but the loss will also be greater in such a case
Among the names that are known in the local capital market as those that are reluctant to use high leverage are among others some of the most prominent and successful businessmen in Israel, including Yishai Davidi, who heads Fimi, the largest investment fund in Israel; Rami Levy, who owns the food retail chain that bears his name and the airline and tourism company Israir; Moshe Mamrod, the controlling owner of the air conditioning and energy company Tadiran; The Cohen Chazon Fund, which recently floated the growing Turfaz flavor and fragrance company on the stock exchange; And Yaakov Luxenburg, the controlling owner of Lapidot Capital, which operates in the fields of real estate, infrastructure and communications. Luxy, as he is known, even uses ghosts to take over companies that have collapsed due to multiple debts (Africa Israel, Sunny).
It seems that the decision to avoid as much as possible from taking on large loans benefited the shareholders of these companies. In the last three years, Luxenburg’s Lapidot Capital shares recorded a return of almost 300%, while Mamrod’s Tadiran Group shares rose by about 214%.
Thorpez It was issued in May last year, and its stock is considered one of the most successful in the recent wave of issuances, with a return of 128% since the issuance. Company stock Infinia (former Hadera Paper), which was chosen as an example of one of the companies controlled by the Fimi Fund, recorded a return of 156% in the last three years.
Fimi: against the current of the private equity world
Fimi Foundation Davidi’s has been operating for more than two decades with a stated strategy of low leverage in the many companies it acquires, and this is in contrast to what is customary in the world of private equity funds, which usually take over companies by loading them with large debt in order to finance the transaction, with the aim of improving the return on capital for the fund’s investors upon realization the investment.
Yishai Davidi, head of the Fimi Foundation / Photo: Yonatan Blum
Fimi operates differently, almost opposite to other private equity funds. The fund takes over companies while immediately reducing their leverage. For example, the case of the industrial company Nair Hadera (now Infinia), which the fund sold last August for NIS 2.4 billion to the infrastructure company, stands out. Uridis of Gil Agmon.
Fimi took over Hadera Paper in 2015, when it acquired the holdings of the previous owner, Len Blavatnik’s Clal Industries. Hadera’s paper carried heavy debts on its back when it was purchased. After taking it over, Fimi reduced the debts, leaving them at a low level until it was sold.
The low leverage is intended, in Fimi’s approach, to support greater business flexibility, and also to strengthen its control over the acquired company.
The fund, which invests in dozens of companies, usually in the fields of industry, which it acquires, improves and usually sells at a profit, maintains a lower level of leverage than is customary in the investment world: the ratio of debt to EBITDA (earnings before depreciation, taxes and amortization), which stands on average at 0.7 among the dozens of companies in which it is invested. By comparison, private equity funds typically operate at much higher leverage, with a leverage ratio of 4 to 6 in the companies they acquire.
Rami Levy: long debt of only 0.3% of the balance sheet
Also the businessman Rami Levi Runs his business with what is seen from the outside as almost an aversion to taking on debt. In Levy’s case, this is an extreme figure, and when you check the total long-term debt of the chain under his control to the banks and the bondholders, you find that it constitutes only 0.3% of the total balance sheet.
Rami Levy / Photo: Tamar Matzafi
Levy is of course aware of the opposite situation, where food chains take the strong flow they generate from food sales and are tempted to take on debt, but this is a dangerous temptation in his opinion, and indeed, large food chains in Israel (Mega, Clubmarket) have collapsed over the years, when they accumulated heavy debts and were unable to pay in terms of their return.
also Tadiran Group of Moshe Mamrod, the air conditioner manufacturer that currently also operates in the supply of infrastructure for the green energy fields, is a company that operates with relatively low leverage. When you calculate the total of the bonds and credit she took from the banks against the balance sheet, you get a rate of only 8%.
Moshe Mamrod – Owner of Tadiran / Photo: Sivan Faraj
“Companies like Tadiran Group,” says a source in the capital market, “perhaps occasionally disappoint in their quarterly performance. But when the debt is low, there is no fear of losing control. I am thinking about my house. I will do everything not to endanger it, and I am willing not to travel abroad for two years.” L, rather than taking a loan that would put him at risk.”
The rationale is clear. As interest rates begin to climb, managers of leveraged companies begin to sweat trying to find solutions. Usually when the bond yield jumps in the stock market, the banks start to demand improved security in rooms. The flexibility to manage the business and deal with an economic crisis is reduced, and hence the path to the loss of control is shortened.
Only in the future will we know to what extent the leveraged companies in the economy will be harmed by the rising interest rate, and which of them will fail to service the debt and reach settlements with the banks and bondholders. What is certain is that if and when this happens to entities with financial strength, an opportunity will arise, as in previous crises, to purchase good businesses at an attractive price .
Loxy learned from the mistakes of his predecessors and brought in a partner
A businessman who knew these rules intimately, and therefore makes sure to operate with relatively low leverage, is Jacob Luxenburg mLapidot Capital the holding company that maintains a low level of leverage (12% of the balance sheet in the solo reports), with Luxi himself making sure over the years to maintain a high holding rate in its shares.
It’s not that he avoided using leverage – which he knew how to harness in favor of the takeovers during the previous decade – by way of debt settlement – over the business of the cellphone importer Sunny Communications and of the Africa Israel Real Estate and Infrastructure Company, after their collapse under Ilan Ben-Dov and Lev Leviev, respectively.
And in general, the high leverage is the second thread in quite a few cases where businessmen who were considered prominent in Israel lost their businesses due to huge debts that they burdened the companies under their control. Leviev, Ben-Dov as well as Nochi Dankner, Eliezer Fishman, Shaul Elovitz, Herzl Havas and the late Moti Zisser are prominent examples of this.
Jacob Luxenburg / Photo: Sivan Farage
Loxy learned from the mistakes of his predecessors, and the following story testifies to this: in one of the final stages of bidding to take over Africa Israel, about three years ago, he reached a crossroads where he could raise hundreds of millions of shekels in the stock market to complete the deal alone, or bring in a partner. He chose to include the investment house Altshuler Shaham as a partner in the transaction.
A source familiar with his activities explained the logic behind the move. “He wanted that if the situation got worse, and the business didn’t work the way he planned, the holes wouldn’t sink the whole ship.” That is, that the high leverage in the purchase will not lead in such a case to the loss of control as happened to the previous owner of Babe. According to him, “Luxenburg would rather lose a lifeline – but not drown.”
In such times when the interest rate becomes high and suffocating, the memory of the era of zero interest rates that existed until a few months ago – a whole decade when the interest rates in the world went to zero – quickly fades.
Erez Vigodman’s megalomaniacal shopping spree in Teva
One of the prominent cases of a luxury company that almost collapsed due to excessive leverage is that of the pharmaceutical giant nature , formerly the flagship of the economy in Israel. About seven years ago, the then CEO of Teva led Erez Vigodmanthe company for a megalomaniacal acquisition spree, culminating in the purchase of the generic division of the American Allergan, a huge deal of 40 billion dollars financed by taking on huge debt.
Erez Vigudman / Photo: Tamar Matzafi
In retrospect, that purchase is the watershed in the fate of Teva, which became, following the failed purchase, a company that is fighting for its life and is required to part with factories and employees in order to service the huge debt, which led to the loss of almost 90% of its value. The CEO who came after Vigodman, Carr Schultz, who was appointed to the position about five years ago, has been working since then to “serve the debt” and gradually reduce the enormous leverage that rested on the company’s shoulders.
One of the businessmen who stays away from taking out loans explains it this way: “When you buy a company and take out a loan for that purpose, then from that moment on you have to constantly check how it repays the debt. This hardly allows you as a businessman to maintain flexibility. In the case of Teva, of course this is Wisdom in hindsight, but if they had made the purchase or a large part of it in exchange for Teva shares, everything would have looked different.”
Teva’s lesson may have resonated in the local business arena, but ultimately moving away from taking credit is also a matter of character. One of the “unleveraged” confesses that he has never taken on debt even in his private life, “not a mortgage and not even a small loan from the bank.”