Israel HY debut unlocks new European funding tool

Author: Gemma Varriale | Published: 5 Mar 2014
Email a friend

Please enter a maximum of 5 recipients. Use ; to separate more than one email address.

Israeli telecoms company B Communications has issued the first internationally marketed high-yield bond to be listed on the Tel Aviv stock exchange. The bonds included a unique covenant package that could open the high-yield market to new companies throughout Europe.

The $800 million bond was issued by Nasdaq-listed B Communications, which owns a controlling stake in Bezeq, Israel’s largest telecommunications provider. Standard & Poor’s assigned the bond a rating of ilA.

The bellwether deal sees a significant shareholder of a public company accessing the international high-yield market based on the credit of its underlying share ownership. As western banks withdraw lending lines in the face of increasing regulation, this deal is set to have wide-ranging significance.

"B Communications’ debut issuance highlights how companies around the world are working with regulators to create structures that allow international investors to tap the high-yield market, bringing new money to the jurisdiction and diversifying the sources of long term debt capital," said White & Case partner Rob Mathews, the firm’s regional section head of EMEA capital markets.

The deal is the first direct Israeli issuance of a high yield bond listed on the Tel Aviv Stock Exchange (TASE). Until now, the up to 25% withholding tax on interest income for non-Israeli bondholders had essentially prevented Israeli companies from accessing the international high-yield markets directly out of an Israeli issuer.

In a market-first, the bond was listed on the TASE enabling it to benefit from no withholding tax on interest income for non-Israeli investors.

The deal at a glance

  • Israeli telecoms company B Communications has issued the first internationally marketed high-yield bond to be listed on the Tel Aviv stock exchange;
  • It is the first to list on the exchange that benefits from no withholding tax on interest income for non-Israeli investors;
  • The bonds developed a unique lock-box structure that could open the high-yield market to companies throughout Europe.

A tailor-made solution

The bonds’ covenant package contained a tailored lock-box covenant in lieu of a traditional restricted payments covenant to account for the company’s primary asset and cash flow structure.

B Communications’ primary asset is its controlling interest (approximately 30.9%) in publically traded Bezeq, the incumbent Israeli telecommunications provider. Revenue is derived primarily from dividends Bezeq pays on a bi-annual basis.

The covenant package provides that a portion of the dividends would be put into a secured lock-box account that would service among other things the issuer's debt obligations, both the senior secured bonds and, in certain circumstances, its unsecured debt.

The remainder of the cash was unrestricted, meaning that subject to certain conditions the company can use it more broadly – including to pay dividends.

Tear sheet

JP Morgan acted as sole global coordinator on the transaction with JP Morgan, Citi, HSBC and Discount Bank acting as book-runners.

White & Case worked with the company’s long standing Israeli counsel Fischer Behar Chen Well Orion & Co and with Carter Ledyard & Milburn. The initial purchasers were advised by Latham & Watkins and Israeli counsel Yigal Arnon & Co. Hogan Lovells advised the trustee and security agent Mishmeret Trust Company.

Key deal documentation

Offering Memorandum

Standard & Poor’s rating report