Israeli businessman Ezra Harel hardly knocked the Tel Aviv market out of its socks when he admitted that his company, Rogosin Enterprises, can't repay the money it borrowed from the public.
The sums in question are money Rogosin raised by issuing convertible bonds five years ago.
At the time, the capital market held Harel's investment skills in high esteem.
To date Rogosin owes its bond-holders some NIS 75 million. The capital market estimates that it will return something rather closer to zero.
The market was not surprised by the announcement chiefly because Rogosin's financial situation has been steadily deteriorating for three years. A year ago it was already hard to find any indication in its balance sheet how it could repay the public.
Few market players believe that Rogosin's controlling shareholder, Harel, will succor the company in order to save his own reputation. After all, a year ago one of his cronies, a portfolio manager, told Ha'aretz that Harel feels no compunction to help out the company. "What do you want of Ezra Harel," the man protested. "He doesn't owe anybody a dime."
"What were Ltd - limited liability - companies invented for?" notes another Harel buddy.
Clearly, therefore, the debt is Rogosin's problem, and Harel feels no obligation to the company or to its shareholders.
Rogosin's bond-holders must be irked by the question of how Rogosin reached this sorry state. Its statements show accrued losses of NIS 80 million over three years, which crushed the company's equity to NIS 30 million, while its debt burden expanded to NIS 180 million.
Where did the money go? Hard to say. Rogosin has been busily wheeling and dealing in Israel and abroad, sometimes with companies controlled by Harel or his cronies, such as for former treasurer of the Likud party, Menachem Atzmon, who was convicted of tax fraud in 1996.
In good company at a bad company
Rogosin may have gone through some tough years. Harel hasn't. Over years he withdrew millions in salary, bonuses and dividends from it and from its affiliated companies.
The question is, why isn't Harel helping Rogosin fulfill its commitments? Simple. He's no novice. He knows he doesn't have to.
His business culture was perfectly well known to investors five years back. It didn't stop them from lending the money. The banks knew how he runs his companies too. That didn't stop them from extending credit.
Harel isn't the only one who raised money from the market and banks despite the lenders having good reason to assume that come payday, he'd default.
Lately Bank Hapoalim, Israel's biggest bank, lent Arie Genger¿s company Lumenis (Nasdaq:LUME) more than NIS 800 million. Lumenis recently shifted to losses. Questions lurk about the reliability of its financial statements. Hapoalim may find itself hefting a weighty addition onto its doubtful-debt column.
Truth be told, Hapoalim's concern about Lumenis should have set in a year ago, when TRI ¿ the company through which Genger holds most of his big business ¿ failed to pay interest on bonds it issued in the United States.
Anyway, Tel Aviv isn't in shock about either Harel or Genger, but the suspicion is arising that the habit of defaulting on debt is spreading to companies that were supposed to be above all that.
One such is the cable company Tevel, which belongs to the IDB group. It is seeking court protection from its creditors. It isn't clear yet whether Tevel's owners, the Recanati family, are turning their backs on the company. Maybe they will keep it floating. The answer will be forthcoming within weeks.
And the blame belongs to¿
The system of the wealthy letting their companies fail can be legally and economically justified. That's the whole idea behind limited liability companies ¿ the guarantee provided by shareholders is limited to the amount they invested in the company. If it was not limited, and entrepreneurs were liable for greater sums, they would become risk-averse.
No, the canker is otherwise: It's that the banks, mutuals, insurance companies, provident funds and other bodies that manage our money continue to indiscriminately lavish loans at low interest and easy terms on companies and entrepreneurs.
The low rates and convenient terms of the loans often fail to compensate for the risk the deals entail.
Namely, the risk that the company owners will shovel the cash into shabby businesses from which they withdraw massive sums, with which they carry out shady deals, make their fortune, bankrupt the company, and watch it collapse ¿ and then tell us that in the world of business, everything is limited liability.