Israel could teach the world some lessons on how to avoid a recession. Annual economic growth was at 3....
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Israel could teach the world some lessons on how to avoid a recession. Annual economic growth was at 3.3% in the second quarter of 2011, inflation was down 3.5% on the same period a year earlier and the unemployment rate was at 6%. These are statistics most governments would envy and come courtesy of a stringent fiscal policy.
The capital markets however have been inconsistent. A vibrant 2010, which saw companies raise $1.9 billion in equity capital in the first half of the year, a welcome increase on $1.7 billion raised in all of 2009, has tailed off in line with diminishing confidence in global markets. The Tel Aviv Stock Exchange may have seen its largest IPO ever in the Azrieli Group's $525 million offering but activity has receded after interest from investors was sluggish and projected valuations did not materialise. "Last year we had quite a bit of IPO activity. From the first quarter of 2011 until today we saw a slowdown in the market when it comes to IPOs," says one lawyer.
Raising capital by issuing straight bonds or debentures has long been the preferred option in Israel and the domestic market has been open for companies in need of funds. "It looks like nothing happened. The number of public offerings, especially of bonds, has grown. At the beginning of 2011 approximately six billion shekels was raised from the public, the amount offered was bigger than the amount in the same time in 2007," says one capital markets lawyer.
New bond work has not, however, provided the most consistent form of mandates on the debt side and numerous prior issuances have needed restructuring.
A decelerator for the bond markets has been new regulations implemented by the Ministry of Finance. Amid criticism that the rules for institutional investors were lax, the Government tasked a committee, headed by David Hodak, name partner at Gross Kleinhendler Hodak Halevy Greenberg & Co, with creating rules for the investment banks. The Hodak Committee's findings, presented in February 2010, recommended limitations and conditions for institutional bodies investing in publicly traded bonds. As one lawyer explains: "What the regulator did was say to these pension fund managers you need to be as scrupulous as if it was your own money. It's meant an end to free and easy money to the corporate bond issuers. There's been a very serious changes in the mood of the market."
Lawyers have also been aiding banks with the implementation of Basel III but also note an increase in lending activity from the domestic banks and state that, increasingly, when approached by more established borrowers, international institutions are vying for the same business as the Israeli banks. "Two of the world's biggest banks are about to greatly increase their level of activity in Israel. They want to be a lot more high profile in the Israeli market place," says one banking partner.
Interest from multinational financial corporations has been further stimulated by the government. In a bid to improve the IT infrastructure within the country's financial sector it announced a Competitive Advantage Program, which provides incentives for the establishment of financial research and development centres by foreign institutions. Barclays and Citi have already taken up the offer and announced plans to commence building.
M&A activity continued its steep incline in the latter half of 2011, as one lawyer remarked: "I would say it's been the most active area of the economy over that period. We're seeing good interest from overseas acquirers, which is always a key business for Israelis."
The ever-buoyant technology sector is still the backbone of most corporate practises and IBM and Facebook have both purchased Israeli companies in the past 12 months. Lawyers say activity in this sector is being stimulated by the need for liquidity or the desire to diversify. "US capital markets are not quite open for Israeli companies right now and as result technology companies which always look to the US as a possible exit are having to look at other ways of raising capital or developing their business," says one lawyer.
Financial services has been the other hot area in Israel. With domestic institutions proving robust in the crisis, foreign hedge funds are showing an interest, as one lawyer says: "It's mainly hedge funds looking at Israeli financial services. It's mostly driven out of Europe but sometimes it's US finds with offices in London."
Energy has dominated the project finance sector in Israel, as one lawyer says: "Oil and gas, private power and renewable energy have been three major areas of activity."
The Israeli government has been the principle driver behind activity. With its push towards becoming 10% reliant on renewable energy by 2020 it introduced a feed-in tariff, which has encouraged developers. Several solar energy projects achieved financial close in the south of the country and lawyers consider this a growth area: "Probably the hottest item right now is solar energy," says one, adding: "The government of Israel has made a decision that there will be between three and four thousand megawatt of alternative energy projects, most of them will be photovoltaic, some of them will thermo-solar or concentrated solar power."
The government's plans for self-sufficiency were given renewed impetus by the ousting of Egypt's president in 2011. Oil shortages and price hikes followed and in April 2011 the pipeline that supplies gas to Israel was sabotaged. With Egypt currently supplying approximately 40% of Israel's gas, it caused serious concerns about the future.
Discoveries of natural gas in offshore Israel have provided some solace and offer hope for the country achieving a degree of energy independence and even becoming a distributor. These finds have also stimulated the project finance market and drilling has commenced in the Tamar gas fields after Isramco secured $750 million in financing. It is anticipated that they will be able to produce gas by 2012. Israel's largest discovery the Levantine field was made in June 2010 and it is thought it could meet the country's energy needs for 100 years.
On the infrastructure side, a relief for the population of Tel Aviv came in August 2011 when the Jerusalem Light Railway finally opened its doors for business after a decade of delays.
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