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Chairman of the ISA, Professor Goshen: “Controlling shareholders have to accept that part of the company does not belong to them”


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“Institutional investors have to formulate fair bonds’ arrangements to save pension plans. Without a fair arrangement large sums of money will be lost. Controlling shareholders, particularly in companies facing repayment difficulties, have to internalize the fact that the companies are no longer under their sole control. They will have to make significant concessions as part of settling their bond’ debt.”- said professor Goshen at the conference organized by the ISA on the issue of “Challenges of Supervising Corporations on the Capital Market”.
Goshen talked extensively on various aspects of the current credit crisis and detailed the solutions put forward by the ISA.  “We are dealing with three major problems” said Goshen “banks’ difficulties to extend credits to companies, companies’ difficulties in recycling their debts and the markets difficulty to raise funds from non-banking sources. The crisis requires dealing with all of the aforesaid. The solutions have to be tailor-made, to suit each particular problem, while at the same time being part of an overall plan.
“The proposals put forward by the ISA are based on the overall perception of the crisis. The proposal to extend government guarantees for banks’ capital raising activities deals with one problem. These guarantees are aimed at helping the banks to raise capital in order to increase credits extended by them to the companies. The recycling of debt is solved by means of newly created leverage funds and the system of credit officers, both of which guarantee effective and simple ways of reaching a debt settlement. To resolve the third problem we propose to offer government guarantees to institutional investment portfolios in the form of loans and new companies’ bonds. This plan has to be perceived as part of the overall plan for dealing with the crisis.”
In his speech Goshen criticized various plans for solving the credit crisis, put forward by different economic entities. “Some plans call for applying sweeping rules for postponing repayment of outstanding debts to all companies. These plans do not differentiate between companies assuming that one uniform solution is appropriate for all. Essentially, they undermine the accepted rules of the capital market, by not taking into consideration the responsibility of controlling shareholders and ignoring the specific needs of each particular company.”
Goshen called the controlling shareholders to face up to their responsibility, go towards the bond holders from the public and, in certain cases, transfer some of the ownership to the creditors. “However,” added the Chairman “institutional investors also have to act responsibly and to examine, both responsibly and effectively, the state of the company and its needs, as well as the management’s ability to steer the company toward recovery, without losing substantial amounts from the pension savings.”
Goshen also detailed the plan for transferring government guarantees to institutional investment portfolios. “The plan intends to provide new credits to companies whose main activities are in Israel, similarly to leverage funds. The guarantee is given to institutional investors in exchange for advanced payment or the commitment to share the profits with the government by the end of a four year period. The plan places restrictions on protected portfolios. It is prohibited to hold bonds of holding companies or companies whose main activities are outside Israel, in the ensured portfolio. The claim stating that the proposed plan is relevant only for capital owners or the super-rich industrialists is populist and devoid of real footing.”
The Chairman of the ISA also stated that: “…the plan places restrictions on companies that issued bonds with conditions to include them in the insured portfolio. The aforesaid limitations include – restrictions on the distribution of dividends, restrictions on transactions with controlling shareholders or related parties without the approval of the bond’ holders, as well as limitations on remuneration of senior corporate officers. Furthermore, the companies will be required to adopt the CG code and to empower the bonds’ trustee with broad powers, including the authority to require immediate repayment of bonds where there are grounds to suspect the company’s inability to meet its financial obligations; all of the aforesaid in line with the regulations to be issued by the ISA.
Goshen attacked the claims that the State’s willingness to insure part of the investment portfolios will lead to risky investments being made by institutional investors. “Institutional investors will make their own investment decisions, without brokerage services. They will also carry the primary risk, in the amount of 20%, while the government carries the secondary risk – beyond the 20%. If we consider the valuations made by international bodies that talk about 10%-15% losses, the chances that an investment portfolio will lose more than 20% of its value are small.” Said Goshen.
“We have to be realistic and ask ourselves what is preferable: provide insurance to institutional investors, in order for them to influx the companies acting in Israel with credit, or to stand by simply waiting “for Godot. Every day that passes” said Goshen “without a solution encouraging the flow of credit into the economy brings closer the end of companies in financial difficulties. This situation means more loses for pension saving plans, more layoffs and further economic slowdown.”

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