Hundreds of real estate owners and developers are traveling to Tel Aviv, Israel to meet with investment bankers that source capital. The mission is to launch a bond that will be traded on the Tel Aviv Stock Exchange (TASE) to raise funds for US real estate projects.
As reported in the July 1 edition of Reuters, foreign real estate developers are expected to issue over one billion dollars in bonds in Israel in 2015. According to the Israeli Securities Authority, foreign bond issuances amounted to $760 million last year. Ofer Grinbaum, CEO, Leumi Partners Underwriters, a leading underwriter of these bonds, said, “In our view the Israeli bond raising trend is far from being a fad. It is a growing sector that is likely to attract more and more and more candidates.”
Demand for the Israeli debt issuance has been driven by local mutual funds, most of which can only buy shekel-denominated bonds traded on TASE. They report that these investors see an opportunity to buy bonds of stable foreign firms, while also receiving interest rates that are about two percentage points above comparable Israeli real estate bonds.
One of the most recent bond offerings underwritten by Leumi Partners took place in May 2015, when the Moinian Group closed a $361 million bond issuance on TASE, the largest debt offering on the exchange to date by a US real estate player. As reported in The Real Deal, the issuance is backed by about fifteen properties in the New York portfolio, including the office buildings at 3 Columbus Circle and 535-545 Fifth Avenue.
Moinian joins a group of other leading real estate owners, including The Related Companies, Extell Development, The Lightstone Group, Pinnacle Companies, Abe Lesser, Joel Gluck, and GFI, that have utilized the issuance of unsecured corporate debt.
The financing has been utilized for real estate assets which include:
- Residential rental apartments (primarily rent regulated) in New York City
- Residential apartments with income generated by federal, state, and municipal government agencies
- Residential condominium and mixed-use luxury apartments
- Retail shopping centers and planned commercial developments across the US
- Hotels, office buildings, and ground floor retail in New York City
The bond proceeds can be utilized to refinance existing debt. In addition, capital raised can be utilized for real estate acquisitions, capital structure reorganizations, and to develop new income-producing assets.
Some of the major benefits of Israeli Bond financing are as follows:
- Interest rates ranging from 3% to 6%, depending on credit rating
- Potential principal repayment grace period of two to three years
- Generally, bonds are unsecured and no collateral is provided
- Interest and principal payment are expected to be made from the portfolio’s existing and future cash flows
- Long durations, in certain cases five to eight years, eliminating frequent refinancing needs
- Some financial covenants required, however, substantially lower than in other markets
In general, the process for a successful bond offering takes from four to six months. It requires that the US firm set up new companies into which properties are transferred. The cash flows associated with the transferred properties are used for payments on the issued bonds. There is a significant amount of time required for the preparation of financial statements to comply with the International Financial Reporting Standards. Appraisals for all properties should be transferred and retained by Israeli professional firms, and approved by a bond rating agency subsidiary in Israel; in addition, the appropriate legal and administrative steps must be taken.
While this form of bond financing is not for everyone, the strong appetite by Israeli investors is resulting in more and more real estate owners taking advantage of this excellent source of capital to meet their current and future needs.