The Ministry of Finance has announced a series of intervention measures in the capital market. The ministry said it will provide a total of NIS 11 billion in capital and guarantees, of which NIS 6 billion will be made available as guarantees to the banking sector for the raising of capital. A further NIS 5 billion will used to set up investment funds in partnership with the pension funds, which will focus on the provision and recycling of non-bank credit. The move is designed to support holders of corporate bonds when the bonds mature.
The Ministry of Finance said that measures aimed to strengthen the Israeli capital market and that they were supplemental to the economic stimulus package unveiled last week. A joint Ministry of Finance, Bank of Israel, and Israel Securities Authority team formulated the financial plan.
Minister of Finance Ronnie Bar-On said, "We'll apply the tools needed to deal with the repercussions of the global crisis on Israel."
As for the timing and scope of the financial measures, the Ministry of Finance noted the global credit crunch and its impact on the Israeli capital market. Today's measures are aimed at dealing with the credit crunch and the market failure that it caused.
To deal with the credit crunch, the government will guarantee NIS 6 billion deferred notes that selected banks will issue. The goal is to expand the supply of bank credit to companies, small and mid-sized businesses, and the general public by tens of billions of shekels. The measure supplements previous credit-related measures included in the economic stimulus package. The additional credit to the business and private sectors is expected to boost economic activity.
The Ministry of Finance said that it decided to provide the guarantees in order to significantly increase credit in the economy. The guarantees will be limited to ten years from the issue date, and will decrease 20% every two years.
The Ministry of Finance and pension institutions (provident and pension funds, and managers' insurance providers) will also allocate NIS 5 billion for the establishment of investment funds to deal with the refinancing of bonds. The measure is aimed at dealing with the long-term savings market failure and it will increase certainty with regard to companies' ability to meet their commitments. It will also indirectly affect the secondary bond market. The NIS 5 billion will be allocated in two tranches: NIS 3 billion immediately and NIS 2 billion in five months.
The Ministry of Finance has decided to set up several investment funds, which will help Israeli companies struggling to meet bond payments because of the global recession. The investment funds will either refinance corporate bonds and spread the payments out, or inject capital directly into companies to help them through the crisis. The investment fund administration will have a range of instruments to help bondholders' vis-a-vis companies by improving the latter's ability to repay their debts. The goal is to enable companies to meet their obligations while staying in business and keeping their employees.
Private investment funds that will be set up on the basis of tenders published by the Accountant General's Office will specialize in the refinancing and management of debt, and will invest in Israeli companies that carry out the bulk of their operations in Israel and most of whose workforce is Israeli. The government capital injections will enable the investment funds to leverage money through pension institutions.
The Ministry of Finance stressed that in order to ensure the success of the measures and to assist the credit markets, the government will bear the primary risk on the investment funds' losses, if any, and will share any profits, in a limited manner.
Also included the program are the forming of a credit mechanism to assist bondholders wishing to reach debt settlements with bond issuers, and tax legislation to promote capital inflows to Israel and investment in the capital market.
Worthy of note are a number of other proposals relating to bondholders. Overseas investors will be exempted from tax on interest on bonds. They will also be exempted from capital gains tax on Israeli equities, regardless of whether or not they are domiciled in a country that has a mutual tax convention with Israel. Until now, only investors from countries with a tax treaty with Israel were exempt from capital gains tax on stocks.
Published by Globes [online], Israel business news - www.globes-online.com - on November 25, 2008
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