By Israel (Izzy) Tapoohi
President & CEO
When I made the decision to leave Israel’s private sector to serve as president and CEO of Israel Bonds, I came to an organization widely recognized - from ratings agencies to the Bank of Israel - as an important factor in building Israel’s economy.
Since starting at Bonds in October 2010, I have become increasingly aware of its continued relevance as a vital, indispensable asset for Israel’s economy, particularly in light of continued geopolitical uncertainty in the Middle East and fiscal difficulties plaguing many euro zone countries.
Indeed, if Greece, Italy, Spain and other failing euro zone countries had a dependable, proactive asset like the Bonds organization in place, it is unlikely they would be in the dire economic situation in which they now find themselves. Suffice it to say, if they had a Bonds-type enterprise that similarly provided worldwide sales of more than $35 billion over the past six decades, life for the citizens of these countries would have been much easier, alleviating their economic distress. This is why the Bonds story has generated queries from other countries, as well as the World Bank, seeking to replicate the Israel Bonds business model.
There are myriad reasons for the success of the Bonds organization. First, when the Israel Treasury issues bonds on the public market, such as Yankee Bonds, they are usually long bonds with 10-year maturities. The Treasury endeavors not to raise funds more than once a year in order to maintain financial credibility with the market and rating agencies. Securities offered by Israel Bonds, on the other hand, complement the Treasury by selling instruments that include short and medium-term maturities. These instruments take advantage of the low interest rates prevalent in the current economic climate, thereby causing an interest rate differential of approximately 2.75% percent - a major benefit to the Israeli economy.
Furthermore, Israel bonds are sold at rates that are extremely competitive and cost-effective. For example, a 3-year bond sold at 1.24% is 1.14% less than what the Israeli Treasury offers in the local public market place. Additionally, upon maturity, there is no exchange rate risk to the Israeli economy, as Israel bonds are borrowed and repaid in dollars, thus allowing the Finance Ministry, under normal circumstances, to borrow less expensively and better plan and predict debt obligations.
However, even though the State of Israel is successfully utilizing the public market for debt financing, it almost certainly would not be able to rely on capital markets in times of economic or security challenge. Under either of those circumstances, it is likely Israel’s credit rating would drop, and, consequently, the cost of financing would become prohibitive.
Nor can an Israel at crisis rely on any sovereign state to assist it financially. The only nation likely to provide support would be the U.S., but its current economic problems and debt burden make it highly doubtful the country could extend significant financial aid.
Consequently, the large, diverse Israel Bonds client base represents a significant, truly irreplaceable asset even the largest financial services and technology companies would envy. Were the State of Israel not to have access to this sizeable client base and subsequently need to re-establish it, the cost of necessary interim credit lines from commercial banks would be quite substantial, and these credit lines would most likely become unavailable in times of crisis.
The operational costs of the worldwide Israel Bonds organization - approximately 3.0 percent of bonds sold - compare favorably when measured against any attempt to replace the Bonds retail operation. Whether through its own efforts or via an independent brokerage firm, the Israeli government would incur major expenses that would include not only the direct expenditure of the Israel Treasury’s capital-raising department domestically and abroad, but also underwriting fees paid to investment banks, the costs of maintaining a large retail client base and the loss of the more favorable Israel Bonds rate differential.
Moreover, the Bonds enterprise is comprised of a professional team with a unique skill set. Similar to leading financial firms, Israel Bonds’ human capital is a valuable resource for the organization. This is particularly true in times of crisis. Losing the Bonds sales and management team and then attempting to replicate it during a national emergency would take at least 18 months due to financial industry regulations and required examinations.
Complementing the Bonds professional team is its lay leadership, which, through extensive networking and advocacy, has facilitated numerous accomplishments for the organization.
The effective Bonds network is also augmented by its institutional investors - states, municipalities, financial institutions, universities and more – who offer the added value of opening doors for the sale of Israel’s state public instruments as well as corporate IPOs and secondary issuance on Wall Street.
Israel Bonds also allows its retail clients – the individuals and Jewish organizations comprising approximately 75% of worldwide annual sales – greater ease of access than the capital bond market, and Israel bonds can now be purchased online. The Bonds eCommerce site has been exceptionally successful since its fall 2011 launching, with online sales currently exceeding $28 million, comprising more than 10,000 clients. The organization’s proactive use of new technologies proves today’s Israel Bonds is clearly not “your grandfather’s Israel Bonds.”
The success of online investments, coupled with the fact that 2012 sales ran 29 percent ahead of 2011, demonstrates that during tough economic times, when it is becoming increasingly difficult to find safe financial instruments that maintain capital and pay a competitive return, Israel bonds are a sound and safe investment – a far cry from the outdated misconception of Israel bonds as “charity.” Investors of every kind value that Israel has never defaulted on payment of principal or interest on Israel bonds, a clear indication of the strength and resilience of the nation’s economy.
So does Israel really require a freestanding organization like Israel Bonds when its debt can be raised in the public markets? The above facts prove the answer remains an emphatic “yes.” For Israel to have the support of Israel Bonds - a secure and independent financial pipeline - is without a doubt, an invaluable and strategic national resource, especially since Bonds clients have proven time and again that when Israel is in the midst of a crisis, they do not walk away.