The Tumult Reaches Israel's Markets

Tycoons Take a Hit, Sending Stocks Down 47% and Roiling Political Scene

TEL AVIV -- The global financial storm hasn't directly imperiled Israeli banks, but worry over some of the country's biggest tycoons is roiling financial markets -- and politics -- ahead of parliamentary elections.

Israel's export-oriented economy is girding for a blow from an expected drop in international demand. Companies from software firms to private-security companies have announced plans to cut back workers. The Bank of Israel recently lowered its 2009 growth forecast to 1.5%, sharply lower than the average 5% annual growth racked up from 2004 through 2007.

Israel's economy is dominated by a relatively small group of family-owned businesses that bought state-owned companies during a privatization drive that started in the late 1990s. These family companies run Israel's largest cellular operators, food retailers, gas stations and banks, to name just a few of their interests.

A Political Problem

All told, Israel's 14 largest family-run business groups, measured by revenue, control companies that made up one-fifth of the market value of the Tel Aviv Stock Exchange at the end of last year, according to Dun and Bradstreet, a provider of financial information.

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Reuters

Israel's export-oriented economy is girding for a blow. Above, a worker last week at the Tel Aviv Stock Exchange, which has dropped 47% this year.

Now, high debt and real-estate exposure overseas among several of these moguls is shaking investor confidence.

The benchmark TA-25 index of the Tel Aviv Stock Exchange, the country's only exchange, has fallen 28% since Sept. 30, and is down 47% this year. Israel's Tel-Bond 40 Index of the top corporate bond issues by market capitalization has fallen 21% this year.

Israel's corporate-bond market developed only in the last five years. But it has attracted big investments from savings plans backed with big tax breaks, including retirement products. That has turned the market carnage into a big political problem. Israel's umbrella labor union has threatened to strike if the government doesn't do something about pension-fund losses. With a parliamentary election two months away, financial-market woes have stolen some of the thunder from national-security issues.

One of the hardest-hit Israeli tycoons so far is Lev Leviev, a self-made diamond magnate. Shares of his real-estate and energy company, Africa-Israel Investments Ltd., have fallen 88% this year. The yield on an Africa-Israel bond due in 2014 jumped as high as 59% from well below 10% three months ago. It was around 35% Monday.

Africa-Israel reported Sunday a loss of some $475 million in the third quarter, due to a revaluation of its property holdings in Israel and abroad. The company has big investments in the U.S. and Russia, and has recently said it was selling some of its properties in New York to pay off debt.

Debt Is a Worry

Africa-Israel also said it plans to freeze real-estate projects not yet under construction and refinance bank loans. "We are confident of this strategy," said Jacques Zimmerman, Africa-Israel's vice president for corporate relations.

Meanwhile, the local subsidiary of Standard & Poor's Rating Service said Sunday that it was considering downgrading the bonds of Delek Group Ltd., controlled by Yitzhak Tshuva, along with the debt of two other Israeli family-controlled groups.

Delek owns a gasoline-station chain, a car importer and an insurer. Through a separate real-estate arm, El-Ad Group, Mr. Tshuva owns Manhattan's Plaza Hotel and is building a casino on the Las Vegas Strip.

Delek shares have fallen 82% this year. Heavy debt is the worry there, too, analysts said.

"The fear of the investors at the moment is that the profits are dropping sharply, it's hard to sell properties and there's no access to finance," said Gal Reiter, an analyst at Tel Aviv-based Clal Finance Brokerage. "Which means it may be difficult for Delek Group to pay back its bond debt." A spokesman for Delek didn't return email requests for comment.

Israel seemed to be headed into today's crisis comparatively better off than the U.S. and European economies, thanks to tight bank regulations, low government deficits and strict mortgage terms. Now, the government is scrambling for solutions like much of the rest of the world.

Last week, the Finance Ministry announced an 11 billion shekel ($2.8 billion) plan to bolster local financial markets. The plan calls for six billion shekels in guarantees for banks to ease credit, and another five billion to create funds that will invest in corporate bonds and loans for companies with cash-flow difficulties. The government also has proposed a 21 billion shekel economic-stimulus package to boost employment and investment in infrastructure.