Law360, New York (February 27, 2015, 3:14 PM ET) — A wave of high-profile U.S. property developers have recently turned to Israel’s attractive bonds market to raise funds for new projects. But while the market is welcoming to American companies, there are four key points clients should keep in mind before jumping in, experts say.
Israel’s capital markets offer an appetizing pool of debt at attractive rates that are nearly half of the interest rates that get tagged onto mezzanine financing in the U.S., which has recently lured such top development companies as Extell Development Co. and Lightstone Group to the Tel Aviv Stock Exchange for $100 million or more bond issuances.
“It’s a very popular product right now. Top real estate businesses in New York City are either looking at it or have completed it or are in the process of doing it. It’s a very attractive opportunity to obtain bond financing from Israel at pretty competitive rates,” said Shahab Moreh, partner-in-charge of the real estate group at WeiserMazars LLP, an international accounting firm.
But, as with any cross-border deal, there are certain unique issues that come with U.S. companies tapping Israel’s bonds that clients should be aware of before jumping into the highly liquid market. Here are four points that experts say are important to keep in mind.
Don’t Rush in Unprepared
Israel’s unsecured corporate bond markets offer developers a tantalizingly cheap alternative to mezzanine financing. Bonds can be secured with yields of around 4 to 5 percent instead of the approximate 9 to 12 percent interest rates that often come attached to subordinated loans.
For this reason alone, it can be tempting for a U.S. developer to dive in quickly to Israel’s capital markets. But that would be a mistake, according to experts.
“You have to understand the people you’re working with, the culture, and the environment in which business is done. I think that a lot of times people rush to do documents and to prepare documents and to negotiate documents, yet they don’t have a deeper understanding of the business environment in which you’re doing deals,” said Yariv C. Ben-Ari, a partner with Akerman LLP’s real estate group.
And in the relatively small Israeli investor world, that could be disastrous, according to experts. The bond issuance process in Israel’s open and transparent capital markets industry isn’t significantly different from the U.S., but it’s important to get the prospectus right to ensure a smooth underwriting.
“You have to be able to be able to communicate your story in a way that is attractive to the investors in Israel,” Moreh said.
Be prepared for a four- to five-month process, with a lot of heavy compliance work necessary to get through on the front end to set the right groundwork for the deal, several experts said.
“There’s fees on the legal side to go through all compliance that are are quite cumbersome, so the beginnings are usually pretty slow,” said Joe Berko, the founder and president of brokerage firm Berko & Associates.
Know What the Investors Want to See
U.S. real estate — New York real estate in particular — tends to go over well in Israel because it’s considered a relatively safe, stable investment, which also offers Israeli investors a prime opportunity to diversify, experts say. Clients should keep in mind that the more stable the asset, the better it will likely go over with local investors.
“The Israeli investor is looking for a well-positioned quality asset in major gateway locations. Cash flow in assets is always preferred. We’re seeing more hotels today,” Berko said. “Keep in mind that every asset will have to show three years of financials going back and then the quarterly statements.”
Several experts noted it’s also important to advise a client to work with an accountant that has boots on the ground in both New York and Israel.
All of the appraisals and accounting valuations tied to the properties will take place in the U.S., and all of the financial information will need to be converted from U.S. generally accepted accounting principles, or GAAP, to international financial reporting standards, or IFRS, Moreh pointed out.
And it’s key to have an adviser that is comfortable with the Israeli underwriting process, where safety and security in investments are top of mind and where there is a high comfort with balance sheet lending, as opposed to U.S.-favored asset-based lending, according to experts.
“I think one of the main things people need to consider is really understanding the metrics that are used in underwriting the deals in order to successfully execute on their deals,” Ben-Ari said.
Be Prepared For Close Relations With Investors
In addition to relatively cheap capital, tapping Israel’s bond markets also allows developers to sidestep the messy inter-creditor issues that often arise when trying to place mezzanine financing on a property, according to Berko. But developers aren’t always prepared for the close relations and ongoing reporting that is often expected in Israel.
There are significant annual and quarterly requirements, and, on top of that, investors like to keep in touch with the borrower.
“We do advise our clients that they have to be able to — or designate somebody able to — go to Israel several times a year to meet with the investors,” Berko said. “It’s not without any strings attached.”
Remember There’s a Sweet Spot
Turning to Israel’s bonds market isn’t going to make sense for every deal, experts say. There’s a sweet spot starting at around $150 million of equity where the benefits really begin to outweigh the challenges of conducting the cross-border deal, according to Moreh.
The sweet spot may even start a little lower, according to some.
“It probably works best for loans that are north of $75 million,” Berko said. “Lower than that, and just the amount of reporting and the annual cost of reporting can be a little too much.”