The sinking structured bond market dragged down the portfolio values of many Israeli companies traded in the United States. The companies had sought surplus yields from highly rated, liquid instruments such as auction rate securities (ARS) as part of their cash-flow management. When the credit crisis erupted in July, the companies suddenly found themselves with a bag full of non-negotiable paper.
Lately, however, the ARS market appears to have stabilized and companies that held onto these securities could soon report the sale of their ARS holdings without suffering any losses. Hedge funds and investment companies may even be rekindling an interest in ARS.
These securities are 10- to 40-year negotiable bonds issued by companies, local authorities, institutions and credit card companies, with interest that changes after one, two, four or five weeks. The liquidity of the ARS is based on the issuing companies' cash flow, from credit card transactions, for example, or from housing loans payments, which earn the bonds a high AAA rating.
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ARS are ostensibly long-term financial instruments, but their redemption period is actually the frequency with which auctions are held to set the interest rates. Last summer, the auctions were canceled due to a lack of interested buyers.
Teva Pharmaceutical is the most prominent Israeli company with an ARS portfolio. As of December 31, 2007, Teva had $651 million in ARS. Following a failed auction on $387 million in ARS, Teva reclassified them as a long-term investment, but their lack of tradability made it difficult to assess their actual value. Based on a model developed by Teva, the company provisioned for a temporary decline in the portfolio's worth, recording it at $444 million in Teva's annual financial reports (F-20) for 2007.
Capital market sources estimate that Teva has been gradually downsizing its ARS holding, to a current value of $300 million, selling the securities each time without losses.
Ormat Industries was stuck with $43.7 million in ARS at the end of 2007, and like Teva, reclassified them as a long-term investment. Unlike Teva, however, Ormat's ARS portfolio was assessed by an external appraiser, resulting in a permanent write-off of $8.9 million, as a securities loss, as of March 31, 2008. Still, in the past few months Ormat has likely been reducing its ARS holdings without further losses.
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