In early 2019, the state of Israel conducted its largest ever international deal, part of which was a first: a 30-year bond in euros. Edward Russell-Walling reports on how joint lead manager Barclays utilised its long-standing history in the country to help make the deal a success.

Team of month 0319

From left: Arik Besser, Len Rosen, Lior Shimoni, Lee Cumbes, Zach Valentiner, Dominik Boskamp

The state of Israel is not a frequent issuer in international bond markets, but it does like to maintain its access. It was in the market early in 2019 with its biggest ever international deal, including an inaugural 30-year bond in euros. Barclays, whose Israel team has had a long relationship with the sovereign, was a joint lead manager.

The relationship dates back to 1994, when US investment bank Lehman Brothers opened an office in Tel Aviv. After the bank's implosion in 2008, Barclays acquired its US operations. While the Tel Aviv unit was not part of the US business, the Israel team elected to join Barclays as well.

"Barclays is the most active investment bank in Israel, working across equities, fixed income, mergers and acquisitions and risk solutions," says Len Rosen, CEO of Barclays Israel and the man who led the Lehman team to its new home. "We have raised more capital in the past 10 years than any other investment bank."

Sovereign importance

Barclays runs an innovations centre in Tel Aviv to encourage new technology start-ups – regarded as a key part of the modern Israeli economy. It is also active in local sovereign, supranational and agency issuance. "When we joined Barclays, it said that the most important client in any geography was the sovereign – it was uniquely focused on that," says Mr Rosen.

He adds that his core team has worked on most of the state of Israel's financings since 1995 and all but one since 2010. Over that period they have also led "a large proportion" of international bond transactions for the mostly state-owned Israel Electric Corporation.

Public debt indicators are moving in the right direction. "Fifteen years ago, Israel's debt-to-gross domestic product [GDP] ratio was circa 100%," says Lior Shimoni, a Tel Aviv-based Barclays Israel director responsible for Ministry of Finance coverage. "Today, it is down to about 60%."

In fact, Israel is one of only a handful of Organisation for Economic Co-operation and Development (OECD) countries to have actually reduced debt over the past decade. It has access to inexpensive capital at home, where national savings are high, and domestic shekel-denominated debt accounts for some 86% of the government total.

At the same time, the government believes in the importance of retaining market access, so in most years it also executes an international issue, usually alternating between US dollars and euros. "It wants a benchmark for Israeli corporates and financial institutions who wish to raise capital, which is why it switches between dollars and euros," says Arik Besser, Barclays' head of debt capital markets (DCM) in Israel and of the bank's central and eastern Europe, Middle East and Africa (CEEMEA) risk solutions group.

Conflicting thoughts

Uniquely, Israel still has neighbours committed to its destruction, which should give lenders pause for thought. But it also has the most capable army in the Middle East, which allows bond investors to focus on the country's economic fundamentals. These are strong and, if anything, getting stronger.

"Israel has experienced 16 years of uninterrupted growth," says Mr Rosen. "That included 2008 and 2009, when most other economies went into recession." In 2018, GDP growth slowed to 3.2%, from 3.5% the previous year. Per capita GDP continues to rise, however, and unemployment is at a historic low of 4.1% (November 2018). The Bank of Israel forecasts GDP growth of 3.4% in 2019.

External trade is well diversified, with services growing as a proportion of total exports. The current account has been in surplus for 16 consecutive years, and foreign currency reserves continue to grow. At the same time, domestic consumption is becoming a more important driver of growth.

One of the bedrocks of Israel's economy today is a hi-tech boom, which has led in turn to a property boom. Life sciences is another. In the World Economic Forum's 2018 Global Competitiveness Report, Israel ranked third for innovation, for company spending on research and development, and for quality of scientific research institutions.

The country says it is the world leader in R&D spending as a percentage of GDP (4.3%), followed by South Korea (4.2%) and Switzerland (3.4%). It claims to have more than 350 multinational R&D centres, set up by companies including Google, Microsoft, IBM and Mercedes-Benz.

There has been good news on the natural resources front as well. The discovery of substantial offshore natural gas fields has been a "game changer", in the government's words, for the energy sector, and has paved the way for gas exports in the near future.

Long-term thinking

The sovereign's previous international outing was early in 2018 when it raised $2bn in 10- and 30-year paper. Its first 30-year issue in US dollars was in 2013. "In the US, 30-year tenors are considered a more natural benchmark tenor," says Mr Shimoni. European long-term investors are more conservative and tend to avoid what they regard as emerging market bonds.

"They have wrongly categorised Israel as an emerging market, which it is not," argues Mr Rosen. "Look at its ratings."

In August 2018, Standard & Poor's upgraded Israel's credit rating from A+ to AA-, its highest ever, alongside Taiwan and the Czech Republic and ahead of China, Ireland and Japan. Moody's and Fitch currently rate the sovereign at A1 and A+, respectively. Index manager MSCI upgraded its Israel index from 'emerging' to 'developed' back in 2009.

Not standing still

No sooner was the 2018 international issue out of the way than Israel began thinking about the next one – with both currency options still on the table. During the year it staged a roadshow in the US and another in Asia. At the end of October, mandates for a deal were awarded to Barclays, BNP Paribas and Goldman Sachs, followed by a non-deal roadshow in Europe and another in the US and Canada.

The last euro transaction had been back in 2017, with a €1.5bn 10-year tranche and a €750m 20-year tranche, yielding 1.55% and 2.46%, respectively. That was the first time a non-European sovereign had gone out to 20 years in euros.

It was decided to proceed with another euro deal for 2019 and in the second week of January, after a two-day roadshow across London, Paris, Frankfurt and Munich, a dual-tranche offering of 10- and 30-year benchmarks was announced.

"We considered whether the market was strong enough for two tranches, and eventually got to 30 years," says Zach Valentiner, a London-based Barclays vice-president of CEEMEA derivatives and DCM. "First we get the right investors interested, and that then dictates tenors and pricing."

The marketing strategy meant underscoring Israel's economic strengths, higher-than-OECD-average growth, low indebtedness and improving credit rating trajectory. It was pointed out that, with initial price thoughts of mid-swaps plus 85 basis points (bps) area 125bps area for the 10- and 30-year, respectively, investors could expect a full percentage point return over, say, France (rated AA).

A rare opportunity

While investors who missed out on a France deal could expect another to come along shortly, Israel was a rarer opportunity. "Some traditional US dollar investors who liked the story said they would find a way to buy [the bonds] because Israel only came once a year," says Dominik Boskamp, a Barclays London-based director in DCM for CEEMEA.

The combined order books totalled more than €15bn, closing about six times oversubscribed. Israel raised €1.25bn from each tranche, with final pricing of mid-swaps plus 75bps for the 10-year and plus 115bps for the 30-year. "Israel paid a minimal new issue premium and executed the deal at the tightest spread it has ever achieved in the euro market," says Lee Cumbes, Barclays head of public sector DCM for EMEA.

The distribution suggests that perceptions of Israel as an emerging market investment have been dispelled. Germany/Austria took 60% of the 30-year deal, while 61% of it went to insurance companies and pension funds.

"Clearly, these are conservative, long-term buyers, with very high standards for which credits they invest in," says Mr Cumbes. "Moreover, with more than 300 investors across 30 countries, these are obviously widely held views across the markets."


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