Merrill Lynch is sounding a warning about accumulating credit risk by Israeli companies, especially holding companies, after the economic boom years of 2003-07. "With global concerns on inflation and the costs of credit on the rise, the market focus is shifting to the ability of companies to ride out the difficult conditions. We believe that expectations of high CPI and rising interest rates will have a marked impact on the financial performance of Israeli companies until the end of the year."
The study looked at Israel's 40 largest non-financial companies.
Merrill Lynch also warns that access to credit to meet re-financing is becoming increasingly difficult in the medium term as Israeli banks, burned by structural products fiasco will not want to jeopardize their currently low non-performing loan levels by refinancing the low-medium rated credit that was provided so freely in 2007.
Merrill Lynch notes that bank loan growth has stagnated since 2003, but that private sector corporate credit expanded significantly during the same period by an average 7% a year, peaking at 11% year growth in 2007, compared with 2006. The result is that bank credit to companies shrank from 74% of total credit at the end of 2002 to 51% at the end of 2007. Meanwhile, corporate bond issues on the Tel Aviv Stock Exchange (TASE) rose to NIS 324 billion at the end of 2007, 45% of total corporate debt of NIS 742 billion, amounting to 111% of GDP in 2007.
Merrill Lynch does the math: "Assuming a third of outstanding credit is CPI linked, for every 1% rise in the annual inflation rate, we estimate that debt service costs increase by close to NIS 3.4 billion. If correct, the 2.5% rise in the CPI in the second quarter of 2008 would translate into NIS 8.1 billion of additional financial expenses this quarter alone. We model the duration of this credit to stand on 5-6 years."
Merrill Lynch says that the companies most affected by this situation are holding and real estate companies, while the least exposed companies are telecoms, consumers (auto, food and retail), and chemicals. Companies that exploited the "market rally to supply external banking credit, based not on need but opportunity, are now the most sensitive."
Under these circumstances, Merrill Lynch give "Buy" recommendations to the following companies which "should ride out market tumbles relatively easily": Teva Pharmaceutical Industries Ltd. (Nasdaq: TEVA; TASE: TEVA), Israel Chemicals Ltd. (TASE: ICL), and Delek Automotive Systems Ltd. (TASE: DLEA). Merrill Lynch also gives a "Buy" recommendation for Bank Hapoalim (TASE: POLI; LSE:80OA), which is not included in the study.
Merrill Lynch mentions the following companies in the least sensitive/ best positioned category of companies that usually only raised money according to need: Delek Automotive, Bezeq The Israeli Telecommunication Co. Ltd. (TASE: BEZQ), Partner Communications Ltd. (Nasdaq: PTNR; TASE: PTNR), Osem Investments Ltd. (TASE: OSEM), and Blue Square Israel Ltd. (NYSE: BSI; TASE: BSI).
Published by Globes [online], Israel business news - www.globes-online.com - on July 17, 2008
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