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Sandro Rosell
FC Barcelona President
Tuesday, October 24, 2017

From 2015 to early 2016, the Israeli bond market heartily welcomed U.S. developers and their investments. Hundreds of millions of dollars were raised, and the Tel Aviv Stock Exchange became known as a viable source of funding for U.S. projects, particularly at a time when EB-5 was having legislative obstacles. Then the Urbancorp fiasco put a halt to all the merriment. In late 2015, the Canadian condominium developer raised $48 million on the Tel Aviv Stock Exchange. In April 2016, it filed for bankruptcy protection, and the Israel Securities agency suspended trading of its bonds. Apparently the firm had failed to disclose that it was severely overleveraged and facing major difficulties back in Toronto. Israeli investors balked and began to reject all U.S. offerings.

Now, one year later, the Israeli market for U.S. firms has rebounded and even gained momentum. As reported in a recent article in the Real Deal, thus far in 2017, U.S. developers have raised more than $1 billion on the Tel Aviv Stock Exchange. As per data from InFin, this surpasses the approximately $945 million raised in all of 2016. This April, there were $4.1 billion in bonds issued by 21 U.S. companies trading in the Tel Aviv exchange. This comprised of roughly 5 percent of the total corporate bond market in the Israeli market.

Further, the U.S. developers are now receiving terms closer to what their Israeli peers get. American firms are no longer treated like a novelty, but rather a tried and true investment opportunity. Not only that, but pricing for each U.S. company is now more based on its own merits, rather than just as part of the American picks. In the past “everyone called them ‘the American companies,’” says Meital Navon, an analyst at More Investment House. “They didn’t distinguish between multifamily or luxury or development.”

Over the past few months, new companies and old timers have both been met with high demand and lower interest rates. In January, Jeff Sutton’s Wharton Properties raised $243 million with a 3.9 percent interest rate. In March, David Marx’s Marx Development Group issued two separate bond offerings, raising $61 million and $69 million, each at a 3.75 interest rate. In April, Joel Weiner’s Pinnacle Group raised $120 million at a 3.6 percent interest rate. These consecutive offerings respectively broke records for the lowest interest rate of any American real estate company on Israel’s bond market thus far.

In 2008, Leser Group, a commercial landlord by Abraham Leser, was the first U.S. firm ever to enter the market. The recession put a halt on such activities until 2014. The U.S. firms across the board would be marked with higher interest rates than comparable Israeli companies. This actually provided an opportunity for investors who realized that the increased rate was a function of fear and not actually a greater risk. The realization took a while, because few investors had a staff available to analyze the particulars of a multifamily or condo real estate developer across the sea. But the knowledge paid high yields.

It was then in the midst of the investor’s giddiness, in late 2015, that Urbancorp raised its debt at an interest rate of 8.65 percent. When the company missed the deadline to release its year-end earning report in March, the bond price collapsed, trading halted on the bond and then Urbancorp filed for bankruptcy. All American companies took the blame. In retrospect the warnings were there all along in Urbancorps’s prospectus. Still, Israeli investors turned hostile to U.S. companies across the board, rejecting foreign IPOS as well as veterans. It took until September for the market to begin to forgive. It was those companies who had been popular and consistent players that Israeli investors warmed up to. The market had already watched them complete developments, close on acquisitions, and grow their rental income.

In November, Wiener’s Pinnacle Group, well known in Israel as Zarasai, issued a fourth Israeli bond at an interest rate of 4.35 percent. It was a success, with a reported 300 percent oversubscribing. The turnover continued and widened. Today, the U.S. firms are still paying higher interest than their Israeli competitors, but only slightly. The spread is justifiable, being that more research is required to understand the possibly greater risk inherent in dealing with foreigners. For those willing and able to accept that risk, the payout is greater.

“We’re almost there. We are very close to the Israeli companies. The smart investors started to see that not everyone is Urbancorp,” said Rafi Lipa, a principal at Victory Consulting. Mr. David Marx took it even a step further saying: “It (Urbancorp) tested the market, and ultimately strengthened the market. It’s like a relationship. When you recover from the first fight it strengthens the relationship.”

By: Ilana Siyance