Real-estate companies can raise unsecured debt at 5 to 6% or even less. This is less than half the rates paid for mezzanine loans. US-based real-estate companies have used this tool successfully during 2014 and 2015. Some of these companies are practically household names, such as "Moinian" that raised 380 million dollars at 3.8% and "Related" that  raised 230 million dollars at 4.5%. Others are low key family based companies like Copperline Partners that raised 90 million dollars at 6% with the help of our team.

 

US real-estate companies discovered the Israeli capital market as a source to raise unsecured debt. While this is a novelty for US companies, Israeli companies have been using the bond market as a primary source of cheap financing for decades. Israeli financial investors are eager to gain exposure to the booming US property market. This allows them to pick up more yield, than they can get from comparable Israeli companies.

In 2014, US companies raised approximately 700 million dollars. During 2015 the funds raised exceeded 1 billion dollars. And this is just the tip of the iceberg. The potential annual raise in Israel for foreign companies is much higher.

 

Unsecured Corporate Level Debt

The funds are unsecured corporate level debt. They do not replace the senior debt nor do they interfere with any existing financing. Nothing changes on the property level! The company can continue in its normal course of doing business. It can continue financing or refinancing its properties, as usual.

 

Possible uses for these funds are:

• Buy-out of equity partners;

• Replacement of expensive mezzanine debt;

• Equity money for purchase of properties;

• Capital improvements;

• Build up; etc.

 

Indications for Competitive Bond Issuance:

To be able to use this tool successfully and achieve attractive interest rates, the company should have the following minimum base:

    1. Income producing - with no more than 20% non-yielding assets.

    2. At least 8-10 different assets.

    3. Shareholder's equity of at least 100 million dollars.

    4. And a minimal issuance of 60 million.

 

Many companies have diverse holding and debt structures involving different lenders and partners.  This structure allows the company to use the residual equity to raise additional funds. The company can use these funds at its sole discretion for the development of the company. Issuing bonds requires adapting the structure of the company to the requirements of the ISA - the Israeli Securities Authority. This adaptation will allow the company to return to the market and raise funds periodically, time after time.

 

Time to Market

The initial process will take about 3 months. Any other issuance during the first year can be done in 2-3 weeks, and after one year the company can reach out to the market and raise funds in 3-4 business days. Most companies raise again and again. Usually each consequent raise is cheaper than its predecessor.

When the market shifts, purchase opportunities are abundant but US lenders are less generous in giving loans, our clients will enjoy a key competitive advantage – they will be able to continue to raise bond financing and pick up properties for attractive prices while many of their counterparts will lack liquidity.

 

First Raise

For the first bond issuance, the company will incorporate a new entity in the British Virgin Islands. The company’s shares in each and every one of the LLC's holding the properties will be transferred to this new entity. The transfer is not considered  a sale. It will not trigger any tax implications. It will not cause any change in control covenants forbidden by lenders. It is important to know that the company is only required to transfer its own interest in the properties to this new structure. Furthermore, the company can decide which properties to use and which to leave out of this structure.​

 

Properties Valuation

To evaluate the target portfolio for rating purposes, the company will hire a US appraiser. The valuation will be done according to IFRS - International Financial Reporting Standard. This means that the appraiser will give each property its fair market value, without any deduction whatsoever.

 

The Rating Process

The newly established BVI Company, holding the sponsors interest in the designated properties, shall be rated by one of local branches of the rating agency - either S&P or Moody's. Due to a spread of 4 notches between Israel's rating and the US rating system and based on size advantage, the rating in Israel will be much higher than it would have been in the US.

 

Summary

• The bonds proceeds can be used as equity, mezzanine, construction loan or any other use deemed by the company as necessary.

•  Upon completing the first issuance, the company will create a platform that will enable issuing additional debt in only a few days. 

•  Unlike any other kind of debt, this structure will enable you to increase the debt amount, upon any increase in the assets value.

•  There is no need to repay the principal - over 95% of the overall bond's principle is being refinanced by issuing a new bond series in the Israeli market. 

• The bonds are issued at a very attractive interest rate, compared to any other alternative funding.  According to the Israeli rating scale, US real estate companies enjoy a significant rating advantage. The assets will be measured in accordance to their fair market value without any deductions, thus enlarging the value of the portfolio and the company's equity.

• In tougher times, our clients will be liquid, because of their ability to raise capital in Israel.

 

How to get started…

The hiiRo team can evaluate your portfolio. We can provide an expected rating and possible issuance size, as well as the terms of raise. To do so please fill up the excel sheet on our website. Within up to two days of receiving the information, we shall be in a position to ascertain the feasibility of the process and its expected terms.

 

We are here to answer any questions you may have.

Thank you very much.