Chalk up another casualty of fallout from reeling Gilat Satellite (Nasdaq:GILTF). Yesterday Israel learned that the First International Bank of Israel had succumbed to the allure of Gilat's high-yield convertible bonds, issued in February 2000.
The bank is thought to have bought enormous amounts of the U.S.-traded bonds for its proprietary portfolio. Its fling resulted in an extraordinary provision of NIS 28 million for the third quarter, due to the drop in value of its proprietary portfolio.
Israeli banks are prohibited from buying Israeli stocks for their proprietary portfolio. But they may invest in bonds traded in Israel, and in stocks and bonds traded outside Israel.
Most banks invest in government bonds, or corporate bonds boasting the highest rankings. FIBI, however, chose to invest in Gilat's paper.
File it under vested interest
Nor did FIBI stop there. Capital market sources tell of phone calls the bank's favorite clients received about a year ago, in which the bank temptingly offered special financing for investment in Gilat Satellite bonds.
Brilliant. Simple. The return on the bonds significantly exceeds the interest the customer would have to pay on the loan taken to buy the bonds. That gap in rates is pure profit for the customer.
Capital market sources surmise that the brains behind the scheme belonged to FIBI's senior assistant general manager Zeev Gutman, who came over last year from Union Bank of Israel, and Yoram Sirkis, head of its securities department. Maybe so, maybe not, but one may assume that chairman Shlomo Piotrkowsky knew all about it.
The gain for the bank would be increased credit to its customers, translating into higher financing income, on top of commission on all these transactions in securities.
Then a snag arose
At least one major customer bit: the Tel Aviv-traded hi-tech investments vehicle 3PEN Technologies.
3PEN hasn't done much investing in the last year, but before the dry spell it announced a major purchase of Gilat bonds, for $1 million. It borrowed somewhere between 80% to 90% of the sum from FIBI.
But a snag arose. Gilat found that its forecast of 300,000 subscribers for Internet by satellite by year-end 2001, growing to a million by year-end 2002, was a tad overblown. Nor would it meet its sales forecasts. Once it shared its suspicions with shareholders, its shares promptly dived from a high of $184 to less than $4. Its market cap shrank from more than $3 billion to $92 million.
Gilat's bonds also tumbled and their yields rose sharply, in keeping with the principle of more risk-higher return.
Discount Investment Corporation took a beating on Gilat shares, writing off NIS 40 million from its investment for the third quarter.
Businessman Meir Shamir, through Shamir Financing, was down 15 million, on paper, from his NIS 55 million investment in Gilat bonds. And that was at the end of the sq, before Gilat's bonds truly sank after Gilat's earnings warning for the third quarter. More adjustments are in the offing for Shamir, who had borrowed money to buy the bonds.
FIBI starts to sweat
Gilat's massive $350 million debt offering wasn't the only thing that had FIBI breaking out into a cold sweat. Its Internet by satellite venture Starband was another migraine, for its creditors ¿ including FIBI. Last year a consortium of Israeli banks lent Starband $150 million, in one of the biggest loans extended to an Israeli hi-tech firm.
Other enormous hi-tech borrowers include mobile operator Partner Communications (Nasdaq, TASE: PTNR, LSE:PCCD) and telecoms equipment maker ECI Telecom (Nasdaq:ECIL). The huge loans to Starband reflected both the banks' faith in Gilat ¿ and the euphoric mood pervading the capital market at the time.
Leumi put up most of the credit, providing $90 million for three years, redeemable in June 2003. Israel Discount Bank and FIBI each ponied up another $30 million. Starband put up all its assets as collateral, but if Starband defaults, its assets won't be worth much.
Starband had counted on a public issue by year-end 2000 in order to return part of the loans. But then another snag arose - the markets collapsed, leaving the company laden with debt, and the banks laden with anxiety.