Israel Not Immune To Real Estate Mess
Written by: Aaron Katsman | August 6, 2007
By Aaron Katsman
IsraelNewsletter.com
News this past Thursday of Israeli real estate developer Hefziba collapse sent shockwaves through the local financial markets. News that the company has over 1.6 Billion Shekel(about $380 Million) in outstanding debt, not including another 300 Million Shekel in a bond that they can’t pay back sent the local stock indices 4% lower.
My hunch is that this may be the begining of a much larger problem with the local financial markets. Billions of dollars were raised in bond offerings over the last 9 months, with many of the companies who successfully raised money, having lousy balance sheets. The question is how these companies plan to make their interest payments as well as pay back principal. Why is this such a big problem? Well, just like the subprime mess in the US, and the yet to be determined losses that will be taken by the financial sector, in Israel, there is no question that all the largest banks (of which there are a whopping 3) have huge exposure via both lines of credit as well as holding debt of these developers. Throw in the insurance companies and brokers, all who were the almost exclusive buyers of this debt, and we could be on the verge of a real mess in the local financial sector.
The question for foreigners who still want Israeli exposure is “now what?” Until now, the big banks (Hapoalim, Leumi, Discount) were among the most widely held stocks by foreigners. What I think we will see is a rotation from companies that make most of their money locally to multi-nationals that do R&D in Israel but not much else and have had solid earnings. Companies like Nice Systems (NICE), Alvarion (ALVR) and Given Imaging (GIVN), which all trade in both the US and Israel, should be the recipients of the aforementioned rotation.
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Disclosure: Author’s fund is long NICE,ALVR,GIVN as of 8/05/07.
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Aaron Katsman is the lead portfolio manager for the Israel Growth Portfolio and Managing Director of America Israel Investment Associates, LLC. For more information, go to www.israelnewsletter.com or call 1-888-327-6179, or email aaron@profile-financial.com.
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