Despite political and diplomatic uncertainties and a volatile economy Israel appears to be selling its investment story to international capital markets. "There is a lot more banking activity in all directions," says Ron Lubash, Lehman Brothers managing director for Israel. "The country has opened up. You see a whole slew of new companies and new issuers." Lehman predicts at least six new debt issues in the coming year. "There is a general acceptance of Israel shifting to the debt market," says Lubash. "Now the door is open. Israel has more exciting growth prospects than some other as, and a pretty good debt-repayment track record. Both country and companies have little default history."
Israel may be a tempting market for the banks, many of which have stayed out because of the threat of an Arab boycott, but some of the story has to be taken on trust. Economists point to near double-digit inflation, comparatively slow growth at 3.5%, and a budget deficit of 3.7%. One economist admits: "Israel is a tough sell at the moment."
For the moment, though, banks are talking up Israel, especially the opportunities surfacing in the equity and debt markets. Many have set up representative offices in the main commercial centre, Tel Aviv. Barely a month passes without a new entrant to the local market hanging out his shingle, in the hope that a high-tech entrepreneur or company official will drop in with a listing proposal. Citibank, Salomon Brothers and Lehman, among others, have all set up offices in the last 30 months: BNP and UBS plan to do so.
There are three prizes for the winners of the headlong rush to Tel Aviv: a place in the government's affections as it goes to the international capital markets with regular yankee, Eurobond and samurai issues; lead positions in syndicated loans for big Israeli corporates; and underwritings for the IPOs of small, high-technology start-ups on Nasdaq.
Citibank opened a representative office in February 1996. Ronny Strauss, the bank's Israel director, gives three key reasons for the move: Israel's new stability in the wake of the Middle East peace process; the strong economy; and Israel's key role in Citibank's strategy for emerging markets. "We cannot develop a regional presence without a presence in Israel," Strauss notes on the last point.
Citibank, Strauss says, is "assessing the market" for products such as its treasury management system, trade finance, and investment management. If the findings prove positive, Citibank will upgrade its representative office to branch status and then go "head-to-head with local banks in fund-raising and trade finance". Says Strauss: "I don't believe that the local banks have the capacity to underwrite syndicated loans or bonds, and fund-raising is Israel's fastest-growing area."
Another old Israel hand to open a Tel Aviv office is Salomon Brothers. It was co-lead with Lehman in Israel Electric's $600 million offering last year and has participated from New York or London in many offerings by Israeli state and quasi-state entities. But Salomon is now approaching a new customer in Israel and needs to get on the spot. "It is more difficult to deal with private companies out of New York," says the head of its representative office, Itay Makov. "[Setting up locally] shows our commitment to the government of Israel."
The bank promises to bring international standards to what Makov sees as the sometimes poorly serviced Israeli high-technology sector. "We treat the Israeli companies in the same way as we treat us companies," he says. "When Israelis say 'your competitors are willing to take us public a year earlier, your competitors are more flexible in their standards' we insist that we stand on quality. We look at the market as a global market."
Most to lose
The bank with most to lose because of competition from new entrants to the market is Lehman Brothers, which has had a close relationship with the Israeli government for 36 years through its New York-based director, Harvey Krueger. Lehman, which claims to have had 75% of the debt-issuance market and 50% of new equity-raising in 1996, was also the first foreign bank to open a local representative office, 30 months ago.
Lubash says Lehman is ready to see off the newcomers. "We intend to be the dominant leader. Others are muscling in. That just means the battle is stiffer, but in most cases that doesn't change the outcome. All of the credible parties are playing ball in this market. Not all of them will be there for the long term, but right now all are."
The competition for Israeli business has been clear when the government has invited proposals for mandates to run its medium-term note programme. On one occasion, 30 banks lined up with proposals and the government achieved wafer-thin pricing, says Citibank's Strauss. "Israel was seen as no different from any other respectable OECD issuer," he says. "What happened was typical for deals undertaken by a developed institution or country." Salomon won the bookrunner position for the Israel government bonds in December 1995 (for $250 million), and Salomon won the position in December 1996 (for $200 million). Both tranches had coupons of 6.375%.
An Israel Electric offering for $600 million launched last year had coupons ranging from 79bp above treasuries on the first $350 million over 10 years to 129bp over treasuries on $125 million over 100 years. Issues of this type are set to be a fixture over the next few years, says Lubash, as the larger privatized and quasi-state companies exhaust their permitted domestic borrowing levels and have to go to the international capital markets.
Prices are equally tight in the underwriting of Nasdaq-listed high-technology companies, says Lehman's London-based executive, Amir Chen. The prize here is a stake in the fast-growing sector of the Israeli economy. Hundreds, perhaps thousands, of small companies are queuing up to join the 80-strong Israeli sector on Nasdaq. "It has been an amazing development," says Alan Adler, a director at Evergreen, a high-technology venture capital company linked to Robertson Stephens. Israel venture capital funds have 250 portfolio companies at different stages of development. Many have been operating for three to four years and are beginning to prepare for IPOs. A further 800 or 1,000 smaller companies are in the sector, but earlier in their development.