Despite an unusual structure as the holding company for a fixed-line monopoly, B Communications issued Israel's first dual-listed bond to considerable demand.

Listed on Nasdaq and the Tel Aviv Stock Exchange, B Communications was founded in the 1990s, initially operating under the name 012 Smile. Back then, it was one of Israel’s earliest providers of internet services, but in 2009, the company agreed to buy 31% of Israeli telecommunications group Bezeq from a private consortium, comprising UK venture capital group Apax Partners and two wealthy Israeli entrepreneurs.

As part of the deal, B Communications was obliged to sell all its other assets to comply with Israeli competition law and it has remained a single asset business ever since.

“We went from a business with 700 employees and many assets to a business with five employees on an unconsolidated basis and one asset,” says chief executive Doron Turgeman.

The acquisition of the Bezeq stake left B Communications with NIS5.3bn ($1.5bn) of debt, but this was reduced steadily between 2010 and 2013, such that, by November 2013, the group had outstanding debt of NIS2.7bn. Around this time, Mr Turgeman, who was CFO of the business until 2011, began talking to bankers about restructuring the group’s finances. “Most bond transactions in Israel have short maturities and require you to repay the debt annually. We were looking for longer term finance,” he says.

Working with bookrunner JPMorgan, the company began to consider the high-yield market, specifically an $800m, seven-year issue. They were also keen on a dual listing, offering bonds not just in Israel but in Europe and the US too.

“The Israeli market is not large enough to accommodate $800m of debt so we needed international support. The dual listing is an advantage for investors too as it means they can trade on the Tel Aviv exchange and over the counter outside Israel,” says Mr Turgeman.

First dual listing

Gaining regulatory approval was time consuming as B Communications was the first Israeli company to attempt a dual-listed bond. By January, however, all the necessary documentation was in place and the company embarked on a three-week roadshow, visiting London, Paris, Frankfurt, New York, Boston and Los Angeles, as well as Tel Aviv.

“We saw numerous investors during those three weeks. Most of their questions focused on our rather unusual structure, as a holding company with just one asset, and on Israel itself – the economic outlook and the geopolitical situation,” says Mr Turgeman.

There were questions about Bezeq too. Many former state-owned telecoms groups are regarded as unexciting investments and Bezeq’s earnings before interest, taxes, depreciation, and amortisation decreased from NIS5.2bn to NIS4.1bn between 2010 and 2013, with the company forecasting a further fall to NIS4bn for 2014.

However, B Communications’ main source of income comes from Bezeq dividends and the telecoms group distributes 100% of net profits to shareholders, which equated to NIS550m last year.

“Our bond was structured in a unique way in accordance with our corporate structure. Every year, we will pay NIS220m on average as interest on our bonds and a further NIS100m will go towards unsecured debt repayments. The remaining amount, which will be about NIS220m will be divided in two. Half of it will go in a lock box, which will be held as security for bondholders, and the rest will be unrestricted cash,” says Mr Turgeman.

Interest headroom

For potential investors, the key point about this arrangement was the difference between the expected dividend from Bezeq – more than NIS500m – and the amount needed to service their coupon – NIS220m. “The structure gives us plenty of headroom,” says Mr Turgeman.

Investors seemed to agree. Initial price guidance suggested a coupon of 7.5%, announced on February 10, when the deal was launched. Demand was sufficiently strong that the coupon was cut to 7.375% but orders continued to flow in. By the time the books closed, JPMorgan had received orders of $1.8bn from the US and Europe and $520m from Israel so the bonds were almost three times oversubscribed.

“We were surprised – and of course very pleased – with the response. JPMorgan did a marvellous job. This was the first dual-listed bond from an Israeli company, it was our first international transaction and our company has an unusual structure,” says Mr Turgeman.

The bonds were also rated BB- from Standard & Poor's and Fitch, a rating that contributed to the coupon level. “We paid a price for being first. But we have seven-year money with no financial covenants and if we come back to the market in a few years time, I am sure it will be easier,” says Mr Turgeman. 


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