"At the end of the current cycle we will not reach a recession, but rather a slowdown in the rate of growth", predicts Rony Patishi-Chillim, senior vice president at investment bank Lehman Brothers, in an interview with "Globes." According to her, this cycle differs from previous ones because the market is far more diverse, and is not as technology-focused as it was in the previous round. Mergers and acquisitions will continue, but this time around they will not be carried out by private equity players with "cheap money" to spend, but by real strategic players.
Globes: Do you feel the US is now entering a recession or is what we're seeing just a slowdown in growth?
Patishi-Chillim: "There is a decline at present, and it will be followed by a low period, and the question is how long it will take for a revival to take effect. The latest macroeconomic data, and the somewhat unclear economic policy in the US, have made people a bit uneasy. I don't believe we will reach a real recession, but rather, a slowdown in the rate of growth, and we are unlikely to see a recovery before the second half of 2008."
How does the current economic cycle differ from previous ones?
"It's different in that it's not technology-focused, but more diverse. Nearly everyone benefited from the economic expansion and more people now feel they've been harmed or that they are at risk of being harmed. The slowdown will not be as pronounced as the one at the end of 2000. The extent of Israeli consumer debt is far less than that in the US, where mortgages can amount to up 120% of the property's value. Revolving credit, and car loans, are also not as developed in Israel as they are over there. So if the interest rate does rise, it will undoubtedly affect every person. Israel will be affected by the global slowdown, but to a lesser extent."
How will the declines on the capital market affect mergers and acquisitions?
"2007 was a record year from the aspect of mergers and acquisitions, and the volume of activity worldwide is unlikely to fall. As for mergers and acquisitions in Israel, until now Israeli companies that wanted to grow looked overseas, while on the other hand, foreign investors looking at the good macroeconomic data coming out of Israel saw opportunities. There are good businesses here, and growth rates are high despite everything, so Israel is attractive. There's a genuine reason for taking a look in Israel and so far the country has weathered the crisis well, a fact borne out by the substantial amounts that companies have managed to raise in recent years.
"On the other hand, Israel is now less exotic because of the credit crisis, since there are now more opportunities on other markets, which makes Israel more expensive. But people will continue to look for good opportunities here on a case by case basis. To finance mergers and offerings you need credit, and the debt market overseas has closed almost completely. Only issues rated AAA can raise funds now, and investors are very wary of sectors that have cyclical activity such as real estate."
The shekel is not strong - it's the dollar that's weak."
What has changed for foreign investors where Israel is concerned?
"People that check out Israel have gotten past the psychological barrier of thinking that Israel is a dangerous place. In the past these were venture capital funds, which are inherently interested in risk, and they invested principally in technology, where the company's physical location is unimportant and can be switched fairly easily. From 2005 and on, foreign investors have been looking more at businesses from other sectors such as Bank Leumi (TASE: LUMI), Iscar Ltd., and Oil Refineries Ltd. (TASE:ORL) - these are investments in Israeli assets."
And what about the dollar?
"The shekel's strength against the dollar is not an Israeli issue. It's the dollar that's weak, not the shekel that's strong. Since 2006 there has been a de-linking between inflation and the dollar. Rental contracts, for example, are now denominated in shekels, not dollars, and people are starting to believe that there is a local currency which is worth using more."
Will you remain involved in the next stage of the privatization of Bank Leumi?
"We represented Cerberus when it first acquired the 10% stake in Bank Leumi and we hope to continue to be involved in the future. We think Bank Leumi is good, and we're checking all the options. Cerberus got burned in this process. On the one hand, they think that this is a good deal, but they have lost faith in their ability to complete the acquisition process. It is important for Israel that foreign investors participate in our economy - it will help Israeli companies expand overseas and it can increase the number of borrowers and lenders here."
What sort of activity does Lehman Brothers carry out in Israel?
"We have three main areas of activity here. The first is investment banking - raising debt and equity, and mergers and acquisitions. The second is capital markets research on Israeli equities, and product marketing by our sales representatives to Israeli institutional investors. The third is private equity funds which are always on the lookout for investment opportunities in Israel.
"Lehman Brothers has a policy of investing together with its clients. We don't compete with our customers, and most of our ventures to date have been chiefly in high-tech and in real estate, where we have collaborations with Big Shopping Centers (2004) Ltd. (TASE:BIG), Nanette Real Estate Group NV (AIM:NAT), BSR, and Adama Holding Ltd. (TASE:ADMA.B1). We check local business opportunities and we can help Israelis to expand beyond the local market. We have the know-how and the ability to help anyone seeking global exposure.
"In contrast to the massive write-downs that the big banks had to make, Lehman Brothers weathered the credit crisis well. We are an organization with a generally conservative approach in risk management, and we will take advantage of the drops to drive further growth. The developing competition for households does not affect us since we are not a commercial bank. The regulatory infrastructure in that area has been tailored largely to the needs of local insurance firms and it is they, not the foreign banks, which will be entering this field at this point in time." Rony Patishi-Chillim has a degree from Hebrew University, and an MBA from Boston University. Among other deals, she led the February, 2007 IPO of Oil Refineries Ltd. on the Tel Aviv Stock Exchange (TASE), apparently the largest share offering ever on the TASE, and was involved in the purchase of a 10% stake in Bank Leumi by the Cerberus Capital Management LP-Gabriel Capital Management consortium.
Published by Globes [online], Israel business news - www.globes.co.il - on February 18, 2008
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