How to raise money in Israel: A developer’s guide A step-by-step look at what it takes to issue bonds in Tel Aviv, a la Barnett, Related and others
TRD Special Report: Boaz Gilad remembers first meeting Gal Amit and Rafael Lipa around 2008, when the U.S. economy was on its knees and Gilad’s firm, Brookland Capital, “didn’t have money to buy a cup of coffee” much less finance the sort of ground-up projects that have since made it one of Brooklyn’s busiest condominium developers.
At the time, Amit and Lipa were working with Brooklyn real estate investor Abraham Leser on an unprecedented deal: taking him to Israel, where a new entity holding some of Leser’s New York properties would issue publicly-traded bonds on the Tel Aviv Stock Exchange (TASE).
“To their credit, they kept in touch with us,” Gilad said of Amit and Lipa. In 2014, with local real estate values catching up to their pre-recession peaks, Brookland went to them to do an Israeli bond deal of their own, raising roughly $35 million.
On the same day, Extell Development’s Gary Barnett raised about $300 million through a bond offering backed by the firm’s enviable portfolio of Manhattan properties. A lot more people started paying attention to the land of milk, honey, and now, capital.
For small-to-mid-sized players, the Israeli bond market allows them to raise corporate-grade debt that they couldn’t score back home. For the bigger firms, it’s a way to do it at a healthy discount to what domestic lenders would offer on mezzanine financing. Since 2008, U.S. developers and landlords have raised over $2.5 billion on the Israeli bond market, according to TASE data cited by Bloomberg. A good chunk of them have holdings in New York, which is perceived as about as safe a bet as they come by Israeli investors and regulators.
But what exactly does raising money in Israel entail? Despite several articles depicting Israel’s debt markets as one of several notable trends in real estate financing – like EB-5 or crowdfunding – there’s been little examination of the dance a U.S. builder must do to tap that capital.
Any company looking to issue bonds in Israel has to navigate a maze of regulatory procedures before making its debt offering, which entails becoming a publicly traded entity on the Tel Aviv Stock Exchange. Indeed, an Israeli bond issuance is in fact an initial public offering except it is debt being offered to investors, instead of equity.
This means your average player can’t simply parachute into Tel Aviv, sign some papers and walk away with funds.
No, an Israeli debt issuance is a months-long tango involving a host of financial advisors, lawyers, accountants, underwriters, credit ratings authorities and government regulators. For American developers and landlords, it requires patience and a willingness to open up to Israel’s sophisticated financial markets.
And most importantly, it requires the real estate.
‘Cherry picking’ a portfolio
Most Israeli bond issuances by American property firms have involved one of a handful of boutique consultancies that have cornered the market.
Like Amit and Lipa’s Victory Consulting, Tel Aviv-based advisory firm InFin led by Yehonatan Cohen and Yossi Levi, alumni of Israeli financial conglomerate Clal – has guided firms including the Related Companies, the Klein Group and Delshah Capital.
Others, like Extell, opted to work directly with Israeli underwriting firms like Apex Issuances, which in addition to its role as an underwriter, offers advisory services to U.S. clients.
These consultants shepherd the entire issuance through; Victory and InFin, for example, have relationships with Israeli financial firms like Apex, Poalim IBI and Clal that underwrite the bonds, as well as contacts at white-shoe law and accounting firms fluent in Israel’s regulatory requirements.
“Before we do everything, we try to be in a position where we see the end of the deal before we start,” Amit said. “In order not to waste money, you need someone that knows all the moving parts, who can see the end at the beginning.”
First, and arguably most important, is “cherry-picking, together with the clients, the most suitable package for the Israeli bond market,” said Levi. It is this portfolio, which lumps a U.S. developer or landlord’s assets within an offshore entity, usually in the British Virgin Islands, that backs the bonds issued on the TASE.
“You put everything on the table and say, ‘This is what I have and what I don’t have,’” Gilad said. “They [the consultants] are the ones who are positioning the situation and telling the [company’s] story.”
Unlike in the U.S., where investors typically fund deals on a per-property basis, this model enables companies to borrow against a larger pool of assets. It creates a corporate entity with multiple holdings and its own balance sheet, spreading risk and enabling firms to raise debt at remarkably low interest rates established developers with solid credit can sell bonds for 5 to 7 percent, about half what they’d pay for mezzanine debt back home.
“If you look at the interest rate that these companies place compared to the cost of mezzanine loans, you see why they come to Israel,” said Ofer Amir, head of the Israeli real estate division at credit ratings agency S P Maalot. “It’s not the Israeli or Jewish connection; it’s the money.
To obtain those low rates, a firm needs to secure a good credit rating from one or both of the two major Israeli ratings agencies – S P Maalot, a wholly-owned subsidiary of Standard Poor’s, and Midroog, an affiliate of Moody’s.
“In order to get a decent rating, you need a major portion of income-producing assets [in the portfolio] that can produce cash and maintain a decent cash ratio that can support the rating,” said Cohen.
This makes multifamily rental housing the most attractive asset for piecing together an Israeli bond deal – “Stuff has to happen in order for it not to yield,” as InFin’s Levi put it followed by retail properties and other cash-generating holdings like hotels and office buildings. Bondholders view a steady stream of income into the entity they are investing in as evidence of that entity’s ability to repay debt.
“They cherish very highly strong cash-generating assets, because those are the foundation to service the bond debt,” said Klein Group president Jacob Klein, whose retail-focused firm sealed a $55 million offering in November. “That’s basically how we built our offering.”
Simplicity is also a virtue; one New York developer who successfully issued bonds in Israel said his issuing portfolio leaned toward assets “with a clean ownership structure.”
“Anything where we owned [a significant majority interest] and was a cash-flowing asset went in,” the developer said.
Meanwhile, condominiums and development sites particularly sites “built to sell,” as several sources put it are seen as riskier bets than cash-producing assets like rental housing, retail properties and hotels, and can hurt a company’s bond rating and the rate it can secure on the debt raised.
Ori Eisenberg, a partner at advisory firm One Ha’am who advised the Moinian Group on its record-setting $361 million issuance last May, said offerings backed by condo assets don’t have the same appeal because bondholders don’t get to profit from the upside.
“I think if you [a condo developer] are ready to pay a higher coupon,” he said, “maybe then the market will be open for you.”
There’s certainly evidence of a lukewarm reception to bonds backed by condo projects and development sites. Extell, in particular, saw its bonds take a hit, with Israeli investors concerned about a softening New York luxury market and potential oversupply on the high end.
This prompted Barnett to visit Israel in March to try and reassure investors, and to host them in New York to “take them through our properties and to show them the quality and the strength of the assets,” he told Bloomberg at the time. Representatives for Extell didn’t respond to requests for comment.
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